Capital Malleability and the Macroeconomic Costs of Climate Policy

Abstract:     
This paper argues for introducing the role of capital malleability into the analysis of environmental policies. The issue is explored by means of a theoretical model, a numerical analysis and a computable general equilibrium (CGE) model. Considering the three approaches together is fundamental in obtaining theory-compatible policy-relevant results. The model outcomes reveal differences between results under separate assumptions regarding the malleability of capital. When capital is imperfectly malleable a carbon policy is less effective than under the assumption of perfect malleability of capital. Therefore, it is important that, especially for the analysis of short-term environmental regulations, the issue of capital malleability is taken into consideration.

Number of Pages in PDF File: 47

Keywords: General Equilibrium, CGE Models, Climate Change Policy

JEL Classification: C68, D58, H22, Q43

working papers series