Document Type
Article
Publication Date
5-2011
Abstract
How should environmental policy respond to economic fluctuations caused by persistent productivity shocks? This paper answers that question using a dynamic stochastic general equilibrium real business cycle model that includes a pollution externality. I first estimate the relationship between the cyclical components of carbon dioxide emissions and US GDP and find it to be inelastic. Using this result to calibrate the model, I find that optimal policy allows carbon emissions to be procyclical: increasing during expansions and decreasing during recessions. However, optimal policy dampens the procyclicality of emissions compared to the unregulated case. A price effect from costlier abatement during booms outweighs an income effect of greater demand for clean air. I also model a decentralized economy, where government chooses an emissions tax or quantity restriction and firms and consumers respond. The optimal emissions tax rate and the optimal emissions quota are both procyclical: during recessions, the tax rate and the emissions quota both decrease.
Recommended Citation
Heutel, Garth, "How should environmental policy respond to business cycles? Optimal policy under persistent productivity shocks" (2011). ECON Publications. 15.
https://scholarworks.gsu.edu/econ_facpub/15
Matlab files for solving model in "Optimal Environmental Policy Under Economic Fluctuations
Comments
Postprint version of article published as:
Heutel, G. (2012). How should environmental policy respond to business cycles? Optimal policy under persistent productivity shocks. Review of Economic Dynamics, 15(2), 244-264. doi: 10.1016/j.red.2011.05.002