Modelling the Economy-Wide Effects of Unilateral Co2 Pricing Under Different Revenue Recycling Schemes in Austria - Part a: Identifying Structural Model Uncertainties

Abstract

Macroeconomic modelling is widely applied to assess the effects of carbon pricing. However, there remains substantial uncertainty on these effects within and especially across different modelling approaches. This paper, Part A, identifies model structure uncertainties and impact chains, i.e. causal relationships inferred in the models, between a Neoclassical model, WEGDYN_AT, and a New Keynesian model, DYNK. Part B (Kettner et al., 2023) complements this analysis by identifying policy recommendations highlighting dividends and distributional effects. Our analysis shows that model impact chains of carbon pricing policies can differ substantially and structurally between macroeconomic models, especially regarding price channels (i.e., prices of labor, capital, producers, goods and services), income channels (especially assumptions on public budgets and capital income) and consumption channels (especially household reaction to income changes). Differences in aggregate results remain small, but we find significant differences in magnitude and direction of changes for consumer price index, income and welfare. Despite these differences, carbon pricing remains an important instrument to help mitigate carbon emissions in all models and scenarios. Transparent documentation of model impact chains can support the identification of robust policy recommendations. Model structure uncertainty analyses should be extended to include more modelling approaches to carbon pricing.

Keywords: model comparison, macroeconomics, carbon pricing, structural uncertainty