Interaction of Carbon Reduction and Green Energy Promotion in a Small Fossil-Fuel Importing Economy

Abstract

We study the incidence of carbon-reduction and green-energy promotion policies in an open fossil-fuel importing general equilibrium economy. The focus is on mixed price-based or quantity-based policies. Instruments directed toward promoting green energy are shown to reduce also carbon emissions and vice versa. Their direct effects are stronger than their side effects, the more so, the greater is the elasticity of substitution in consumption between energy and the consumption good. We calculate the effects of variations in individual policy parameters, especially on energy prices and welfare costs, and determine the impact of exogenous fossil-fuel price shocks on the economy.

Keywords: carbon reduction, green energy promotion, policy mix, interaction of policies

JEL Classification: Q42, Q43, Q48, Q54