Climate Policies, Macroprudential Regulation, and the Welfare Cost of Business Cycles
Marco Carli and
Francesca Diluiso ()
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Francesca Diluiso: Mercator Research Institute on Global Commons and Climate Change
No 543, CEIS Research Paper from Tor Vergata University, CEIS
We study the performance of alternative climate policies in a dynamic stochastic general equilibrium model that includes an environmental externality and agency problems associated with financial intermediation. Heterogeneous polluting producers finance their capital acquisition by combining their resources with loans from banks, are subject to environmental regulation, are hit by idiosyncratic shocks, and can default. The welfare analysis suggests that a cap-and-trade system will entail substantially lower costs of the business cycle than a carbon tax if financial frictions are stringent, firm leverage is high, and agents are sufficiently risk-averse. Simple macroprudential policy rules can go a long way in reining in business cycle fluctuations, aligning the performance of price and quantity pollution policies, and reducing the uncertainty inherent to the chosen climate policy tool.
Keywords: Business Cycle; Cap-and-Trade; Carbon Tax; E-DSGE (search for similar items in EconPapers)
JEL-codes: E32 E44 Q58 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2022-10-31, Revised 2022-10-31
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-ene, nep-env and nep-fdg
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