ABSTRACT

This paper examines the environmental and welfare impacts of pre-announced carbon policies using an environmental dynamic stochastic general equilibrium (E-DSGE) model. We find that pre-announcing a rise in the carbon tax rate could reduce CO2 emissions but would decrease output and investment during the interim period (between the announcement and implementation dates). Pre-announcing an increase in the carbon tax rate from 1% to 5%, 1 and 3 years in advance could reduce the quarterly aggregate consumption by 0.081% and 0.114%, respectively. Compared to carbon taxation, pre-announcing a tightening carbon intensity target could reduce CO2 emissions even more, while pre-announcing a tightening carbon capacity target under a cap-and-trade regime has no such CO2 reduction effect. In a welfare analysis, we show that an unanticipated rise in the carbon tax rate is more preferable to the 1-year, 2-year, and 3-year-ahead announcements. The intensity regime produces a greater welfare than the cap-and-trade regime, which is in turn better than the carbon taxation regime.

KEYWORDS

Anticipated carbon policies; News shocks; E-DSGE model

JCR CLASSIFICATION

Q1

Journal of Cleaner Production

https://doi.org/10.1016/j.jclepro.2020.120342