Expecting the Unexpected: Macroeconomic Volatility and Climate Policy
|Author:||Peter Wilcoxen with Warwick McKibbin and Adele Morris|
|Publication:||Joseph Aldy and Robert Stavins (eds), Post-Kyoto International Climate Policy: Implementing Architectures for Agreement, Cambridge University Press, pp. 857-886, 2009.|
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.