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EXPECTING THE UNEXPECTED: MACROECONOMIC VOLATILITY AND CLIMATE POLICY

Warwick McKibbin (), Adele Morris and Peter Wilcoxen

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: To estimate the emissions reductions and costs of a climate policy, analysts usually compare a policy scenario with a baseline scenario of future economic conditions without the policy. Both scenarios require assumptions about the future course of numerous factors such as population growth, technical change, and non-climate policies like taxes. The results are only reliable to the extent that the future turns out to be reasonably close to the assumptions that went into the model. In this paper we examine the effects of unanticipated macroeconomic shocks to growth in developing countries or a global financial crisis on the performance of three climate policy regimes: a globally-harmonized carbon tax; a global cap and trade system; and the McKibbin-Wilcoxen hybrid. We use the G-Cubed dynamic general equilibrium model to explore how the shocks would affect emissions, prices, incomes, and wealth under each regime. We consider how the different climate policies tend to increase or decrease the shock’s effect in the global economy and draw inferences about which policy approaches might better withstand such shocks. We find that a global cap and trade regime significantly changes the way growth shocks would otherwise be transmitted between regions while price-based systems such as a global carbon tax or a hybrid policy do not. Moreover, in the case of a financial meltdown, a price based system enables significant emissions reductions at low economic cost whereas a quantity target base system loses the opportunity for low cost emission reduction reductions because the target is fixed.

JEL-codes: C68 D58 E37 F41 F51 Q34 Q43 Q54 Q55 Q58 (search for similar items in EconPapers)
Date: 2008-10
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2008-35

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