Optimal carbon pricing with fluctuating energy prices - emission targeting vs. price targeting

Alkis Blanz (), Ulrich Eydam, Maik Heinemann () and Matthias Kalkuhl ()
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Alkis Blanz: University of Potsdam, Mercator Research Institute on Global Commons and Climate Change
Maik Heinemann: University of Potsdam
Matthias Kalkuhl: University of Potsdam, Mercator Research Institute on Global Commons and Climate Change

No 51, CEPA Discussion Papers from Center for Economic Policy Analysis

Abstract: Prices of primary energy commodities display marked fluctuations over time. Market-based climate policy instruments (e.g., emissions pricing) create incentives to reduce energy consumption by increasing the user cost of fossil energy. This raises the question of whether climate policy should respond to fluctuations in fossil energy prices? We study this question within an environmental dynamic stochastic general equilibrium (E-DSGE) model calibrated on the German economy. Our results indicate that the welfare implications of dynamic emissions pricing crucially depend on how the revenues are used. When revenues are fully absorbed, a reduction in emissions prices stabilizes the economy in response to energy price shocks. However, when revenues are at least partially recycled, a stable emissions price improves overall welfare. This result is robust to different modeling assumptions.

Keywords: energy prices; E-DSGE; climate policy; welfare (search for similar items in EconPapers)
JEL-codes: E62 E64 Q43 Q52 (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-dge, nep-ene and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:pot:cepadp:51

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