Fossil energy use and carbon emissions: An easy-to-implement technical policy experiment

Abstract

Macroeconomic research on carbon policy mostly revolves around carbon pricing mechanisms such as carbon taxes, cap-and-trade-schemes, and a mix of them. Despite their relevance, however, carbon pricing is not the only policy available to mitigate carbon emissions. A richer and diversified arsenal of carbon policies may prove more effective in addressing carbon mitigation across different social, economic and geographic contexts. We proposed a policy experiment, which took the form of a technical tax on fossil energy use aiming at stabilizing carbon dioxide emissions. The technical tax responded to variations in all elements that are supposed to alter climatic phenomena, that is, domestic carbon emissions, domestic fossil energy use, and the industrial stock of atmospheric carbon dioxide, to which all world economies contribute. The macro-effects of the technical tax were simulated using an off-the-shelf Real Business Cycles (RBC) model targeting the economy of the United States and featuring a climatic block. The economy was perturbed by a technology shock and an energy-price shock. Special care was devoted to the processes of validation and calibration. The tax was responsive to the business cycle and showed positive aspects. When a technology shock hit the economy, it curbed carbon emissions with minor costs in terms of potential output losses. It also protected the economy from an increase in energy prices, mitigating the fall in output despite the drop in fossil energy use. Last but not least, the tax effectively stabilized carbon dioxide emissions by reducing their variance.

Keywords

• carbon emission
• carbon policy
• fossil energy
• fossil energy taxation
• rbc model