Expecting the Unexpected Macroeconomic Volatility and Climate Policy
Gajendra Singh Chauhan
DOI : 10.3844/ajebasp.2009.232.235
American Journal of Economics and Business Administration
Volume 1, 2009
Problem statement: Analysts have been comparing a policy scenario with a baseline scenario of future economic conditions without the policy, to estimate the emissions reductions and costs of a climate policy. Both scenarios required assumptions about the future course of numerous factors such as population growth, technical change and non-climate policies like taxes. Approach: The purpose of this study was to 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. The G-cubed dynamic general equilibrium model has been used to explore how the shocks would affect emissions, prices, incomes and wealth under each regime. Results: It has been found that a global cap and trade regime will significantly change the way growth shocks will otherwise be transmitted between regions while price-based systems such as a global carbon tax or a hybrid policy will not. Moreover, in case of a financial meltdown, a price based system will enable significant emissions reductions at low economic cost whereas a quantity target base system will lead to loss of the opportunity for low cost emission reduction because the target is fixed. Conclusion: The results of this study have explored these issues by examining the effects of shocks that have actually occurred in the past decade: A surprising surge of economic growth in developing countries and a global financial crisis. Quantity based approaches such as a global permit trading regime tend to buffer some kinds of macro-economic shocks: Carbon prices rise and fall with the business cycle. However, price-based approaches such as a global carbon tax or a McKibbin Wilcoxen Hybrid would provide stronger firewalls to prevent adverse events in one carbon market from causing a collapse of the global system.
© 2009 Gajendra Singh Chauhan. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.