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An analysis of US greenhouse gas cap-and-trade proposals using a forward-looking economic model

Published online by Cambridge University Press:  14 February 2011

ANGELO COSTA GURGEL
Affiliation:
College of Economics, Business and Accounting of Ribeirao Preto – University of Sao Paulo (FEA-RP/USP), Av. Bandeirantes 3900, Ribeirao Preto – SP, 14040-900Brazil. Email: angelocg@usp.br; gurgel@mit.edu
SERGEY PALTSEV
Affiliation:
MIT Joint Program on the Science and Policy of Global Change. Email: paltsev@mit.edu
JOHN REILLY
Affiliation:
MIT Joint Program on the Science and Policy of Global Change. Email: jreilly@mit.edu
GILBERT METCALF
Affiliation:
Department of Economics, Tufts University. Email: gilbert.metcalf@tufts.edu

Abstract

We develop a forward-looking version of the recursive dynamic MIT Emissions Prediction and Policy Analysis (EPPA) model, and apply it to examine the economic implications of proposals in the US Congress to limit greenhouse gas (GHG) emissions. We find that shocks in the consumption path are smoothed out in the forward-looking model and that the lifetime welfare cost of GHG policy is lower than in the recursive model, since the forward-looking model can fully optimize over time. The forward-looking model allows us to explore issues for which it is uniquely well suited, including revenue-recycling and early action crediting. We find capital tax recycling to be more welfare-cost reducing than labor tax recycling because of its long-term effect on economic growth. Also, there are substantial incentives for early action credits; however, when spread over the full horizon of the policy they do not have a substantial effect on lifetime welfare costs.

Type
Research Article
Copyright
Copyright © Cambridge University Press 2011

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