Energy Efficiency Dynamics and Climate Policy

Gregory Casey, Yang Gao and Peter K. Kruse-Andersen

Journal of the Association of Environmental and Resource Economists, 2026, vol. 13, issue 6, 1543 - 1574

Abstract: We study the effectiveness of climate change mitigation policies in reducing carbon emissions, focusing on the channel of economy-wide energy efficiency. Using US data, we estimate an impulse response function (IRF) that characterizes how energy efficiency responds to energy price shocks. Standard climate-economy models cannot replicate the slow transition dynamics observed in the data. We build a tractable model that nests the existing literature and can closely replicate the empirical IRF. The slow dynamics in our model imply that carbon taxes reduce short-run and cumulative emissions less than predicted by standard models. The slow dynamics also imply that higher carbon taxes and greater reductions in output are needed to achieve a given environmental target.

Date: 2026
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