On the effectiveness of climate policies

On the effectiveness of climate policies

by John Hassler, Per Krusell, Conny Olovsson, and Michael Reiter


We present an quantitative integrated assessment model (IAM) designed as a dynamic, multi-region general-equilibrium model coupled with climate and carbon-cycle modules. The energy input into production comes from an array of different sources, including those not based on fossil fuel. The IAM setup is aimed toward policy evaluation, with a focus on policies that are (i) not necessarily optimal and (ii) potentially different quantitatively and qualitatively across regions. We conduct three key exercises. We first compare policies that have the right design–global carbon taxes–but the wrong magnitude: a tax that is set based on worries about climate change that ex post turn out to be overly pessimistic and a tax based on the reverse mistake (an optimistic view that turns out to vastly understate the climate challenge ex post). We find a sharp asymmetry: the former is not very costly at all to human welfare whereas the latter is very costly. Second, we examine taxes that differ significantly by region and discuss the cost of implementing them instead of an optimal–uniform–scheme; here we record welfare costs that potentially are very high. Third, we look at efforts to promote green energy–a suboptimal policy in isolation–and argue that reliance on such efforts is highly hazardous. In addition to addressing these policy issues, we show that the model, which is rather tractable, can be extended in interesting directions.

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