Substitutability and the Cost of Climate Mitigation Policy

Yingying Lu, David I. Stern*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

14 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)81-107
Number of pages27
JournalEnvironmental and Resource Economics
Volume64
Issue number1
DOIs
Publication statusPublished - 1 May 2016

Fingerprint

Dive into the research topics of 'Substitutability and the Cost of Climate Mitigation Policy'. Together they form a unique fingerprint.

Cite this