Expecting the Unexpected: Macroeconomic Volatility and Climate Policy

46 Pages Posted: 9 Jan 2009

See all articles by Warwick J. McKibbin

Warwick J. McKibbin

The Brookings Institution

Adele C. Morris

The Brookings Institution

Peter J. Wilcoxen

Brookings Institution

Date Written: November 1, 2008

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.

Keywords: climate change, development, climate and energy economics, global economics, climate policy

Suggested Citation

McKibbin, Warwick J. and Morris, Adele C. and Wilcoxen, Peter J., Expecting the Unexpected: Macroeconomic Volatility and Climate Policy (November 1, 2008). Brookings Global Economy and Development Working Paper No. 28, Available at SSRN: https://ssrn.com/abstract=1324938 or http://dx.doi.org/10.2139/ssrn.1324938

Warwick J. McKibbin

The Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

HOME PAGE: http://www.brookings.edu/experts/mckibbinw.aspx

Adele C. Morris (Contact Author)

The Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

HOME PAGE: http://www.brookings.edu/experts/morrisa.aspx

Peter J. Wilcoxen

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

HOME PAGE: http://www.brookings.edu/experts/wilcoxenp.aspx

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