An Analysis of US Greenhouse Gas Cap-and-Trade Proposals Using a Forward-Looking Economic Model

Joint Program Reprint • Journal Article
An Analysis of US Greenhouse Gas Cap-and-Trade Proposals Using a Forward-Looking Economic Model
Gurgel, A.C., S. Paltsev, J. Reilly and G. Metcalf (2011)
Environment and Development Economics, 16: 155-176

Reprint 2011-4 [Read Full Article]

Abstract/Summary:

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.

© 2011 Cambridge University Press

Citation:

Gurgel, A.C., S. Paltsev, J. Reilly and G. Metcalf (2011): An Analysis of US Greenhouse Gas Cap-and-Trade Proposals Using a Forward-Looking Economic Model. Environment and Development Economics, 16: 155-176 (http://dx.doi.org/10.1017/S1355770X10000495)
  • Joint Program Reprint
  • Journal Article
An Analysis of US Greenhouse Gas Cap-and-Trade Proposals Using a Forward-Looking Economic Model

Gurgel, A.C., S. Paltsev, J. Reilly and G. Metcalf

Abstract/Summary: 

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.

© 2011 Cambridge University Press