Environmental policy on the back of an envelope: A Cobb-Douglas model is not just a teaching tool

Don Fullerton, Chi L. Ta

Research output: Contribution to journalArticle

Abstract

To clarify and interpret the workings of a large computable general equilibrium (CGE) model of environmental policy, we build an aggregated Cobb-Douglas (CD) model that can be solved easily and analytically. Its closed-form expressions show exactly how key parameters determine the sign and size of effects from a large new carbon tax on emissions, revenue, prices, output, and welfare. Data and parameters from the detailed, dynamic CGE model of Goulder and Hafstead (2018) are used in the CD model to calculate results that can be compared with theirs. Results from the CD model track aggregates from the large CGE model quite closely, even though the CD model omits much detail such as the number of sectors, intermediate inputs, and international trade. A CGE model is quite useful to generate detailed numerical results and to reflect on particular aspects of environmental policy, but the simpler CD model provides a transparent view of exactly how the policy affects key outcomes.

Original languageEnglish (US)
Article number104447
JournalEnergy Economics
Volume84
DOIs
StatePublished - Oct 2019

Keywords

  • Climate policy
  • Energy economics
  • General equilibrium

ASJC Scopus subject areas

  • Structural Biology
  • Biochemistry
  • Molecular Biology
  • Economics and Econometrics
  • Energy(all)

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