Journal
JOURNAL OF ENVIRONMENTAL ECONOMICS AND MANAGEMENT
Volume 84, Issue -, Pages 102-124Publisher
ACADEMIC PRESS INC ELSEVIER SCIENCE
DOI: 10.1016/j.jeem.2017.01.004
Keywords
Cap-and-trade; Overlapping instruments; Leakage; Renewable energy; Climate policy; Feed-in tariff; General equilibrium
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In a parsimonious two-sector general equilibrium model, we challenge the widely-held tenet that within a cap-and-trade system renewable energy policies have no effect on carbon emissions. If the cap does not capture all sectors, we demonstrate that variations of a renewable energy subsidy change aggregate carbon emissions through an inter-industry leakage effect. We decompose this effect into intuitively intelligible components that depend in natural ways on measurable elasticity parameters. Raising the subsidy always reduces emissions if funded by a lump-sum tax, reinforcing recent findings that tightening environmental regulation can cause negative leakage. However, if the subsidy is funded by a levy on electricity, it can increase emissions. These results provide a valuable basis for an informed design of renewable energy policies and an accurate assessment of their effectiveness. We highlight how a state-of-the-art statistic used by governments to gauge such effectiveness, virtual emission reductions, is biased, because inter-industrial leakage effects are not captured. (C) 2017 Elsevier Inc. All rights reserved.
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