Journal Article

Modeling Economywide versus Sectoral Climate Policies Using Combined Aggregate-Sectoral Models


Economic analyses of climate change policies frequently focus on reductions of energy-related carbondioxide emissions via market-based, economywide policies. The current course of environment andenergy policy debate in the United States, however, suggests an alternative outcome: inefficientlydesigned and/or sector-based policies. This paper uses a collection of specialized, sector-based models inconjunction with a computable general equilibrium model of the economy to examine and compare thesepolicies at an aggregate level. We examine the relative cost of different policies designed to achieve thesame quantity of emissions reductions. We find that excluding a limited number of sectors from aneconomywide policy does not significantly raise costs. Focusing policy solely on the electricity andtransportation sectors doubles costs, however, and using nonmarket policies can raise costs by a factor of10. These results are driven in part by, and are sensitive to, our modeling of preexisting tax distortions.