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Emissions Targets and the Real Business Cycle: Intensity Targets versus Caps or Taxes
Carolyn Fischer, Michael R. Springborn
RFF Discussion Paper 09-47 REV | April 2011
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RESEARCH TOPICS:
Abstract
For reducing greenhouse gas emissions, intensity targets are attracting interest as a flexible mechanism that would better allow for economic growth than emissions caps. For the same expected emissions, however, the economic responses to unexpected productivity shocks differ. Using a real business cycle model, we find that a cap dampens the effects of productivity shocks in the economy. An emissions tax leads to the same expected outcomes as a cap but with greater volatility. Certainty-equivalent intensity targets maintain higher levels of labor, capital, and output than other policies, with lower expected costs and no more volatility than with no policy.
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