Substitutability and the Cost of Climate Mitigation Policy

Date

2016

Authors

Lu, Yingying
Stern, David

Journal Title

Journal ISSN

Volume Title

Publisher

Springer Verlag

Abstract

We explore how and by how much the values of elasticities of substitution affect estimates of the cost of emissions reduction policies in computable general equilibrium (CGE) models. We use G-Cubed, an intertemporal CGE model, to carry out a sensitivity and factor decomposition analysis. The decomposition analysis determines the contributions of changes in average abatement costs and changes in baseline emissions to the change in total mitigation costs. The latter has not previously been considered. Average abatement cost rises non-linearly as elasticities are reduced. Changes in the substitution elasticities between capital, labor, energy, and materials have a greater impact on mitigation costs than do inter-fuel elasticities of substitution. The former have more effect on business as usual emissions and the latter on average abatement costs. As elasticities are reduced, business as usual emissions and GDP growth also decrease so that there is not much variation in the total costs of reaching a given target across the parameter space. Our results confirm that the cost of climate mitigation policy is at most a few percent of global GDP.

Description

Keywords

Elasticity of substitution, Mitigation policy, CGE models, G-Cubed, Sensitivity analysis, Decomposition analysis

Citation

Lu Y. and D. I. Stern (2016) Substitutability and the cost of climate mitigation policy, Environmental and Resource Economics 64, 81-107.

Source

Environmental and Resource Economics

Type

Journal article

Book Title

Entity type

Access Statement

Open Access
Open Access

License Rights

DOI

10.1007/s10640-015-9936-7

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