ABSTRACT

This study investigates the role of the production supply chain in the choice of climate policies. We construct an environmental dynamic stochastic general equilibrium (E-DSGE) model that features multiple stages of production and different types of productivity shocks. Existing E-DSGE models for climate policy evaluation assume a single production stage. We find that the optimal carbon tax rates in all production stages are procyclical to aggregate supply shocks and countercyclical to aggregate demand shocks; however, if the shock arises from a particular production stage, the implied optimal carbon tax rates vary across stages and depend on the nature of the shocks.

KEYWORDS

Supply chain; E-DSGE model; Carbon tax rate; Ramsey problem

JCR CLASSIFICATION

Q1

JEL CLASSIFICATION

E32; Q52; Q58

Economic Modelling

https://doi.org/10.1016/j.econmod.2022.106109