Emissions Targets and the Real Business Cycle: Intensity Targets Versus Caps or Taxes

Resources for the Future Discussion Paper RFF DP 09-47-REV

34 Pages Posted: 15 Nov 2009 Last revised: 7 May 2011

Date Written: April 2011

Abstract

For reducing greenhouse gas emissions, intensity targets are attracting interest as a flexible mechanism that would better allow for economic growth than emissions caps. For the same expected emissions, however, the economic responses to unexpected productivity shocks differ. Using a real business cycle model, we find that a cap dampens the effects of productivity shocks in the economy on all variables except for the shadow value of the emissions constraint. An emissions tax leads to the same expected outcomes as a cap but with greater volatility. Certainty-equivalent intensity targets maintain higher levels of labor, capital, and output than other policies, with lower expected costs and no more volatility than with no policy.

Keywords: emissions tax, cap-and-trade, intensity target, business cycle

JEL Classification: Q2, Q43, Q52, H2, E32

Suggested Citation

Fischer, Carolyn and Springborn, Michael, Emissions Targets and the Real Business Cycle: Intensity Targets Versus Caps or Taxes (April 2011). Resources for the Future Discussion Paper RFF DP 09-47-REV, Available at SSRN: https://ssrn.com/abstract=1505447 or http://dx.doi.org/10.2139/ssrn.1505447

Carolyn Fischer (Contact Author)

Resources for the Future ( email )

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HOME PAGE: http://www.rff.org/~fischer

Michael Springborn

Independent ( email )

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