The Macroeconomics of Second-Best Climate Policies

This award funds research that uses economic theory and on the economic and environmental consequences of “non-traditional” environmental policies designed to reduce carbon dioxide emissions. While most economic studies of carbon reduction policies have focused on taxing fossil fuels, this research project focuses on policies that subsidies for the production of renewable energy and mandates for the use of clean energy. The research will use theoretical modelling, a large data set, and innovative empirical methods to investigate how subsidies and mandates can be designed to reduce emissions at the lowest cost to economic growth and efficiency compared to other forms of fuels. In addition, the project will estimate the impact of the Inflation Reduction Act as well as the impact of the Clean Power Plan on both carbon emissions and economic growth. The results of this research project will provide major inputs into policies to reduce carbon emissions, while spurring economic growth and establish the US as a global leader in carbon reduction policies. This award funds a research agenda to study the efficiency of carbon reduction policies other than those that tax fossil fuels. The project will develop and estimate a quantitative, dynamic model of the macroeconomy and the environment to test the efficiency of “second best” carbon policies. The model extends the standard modeling framework in two ways: first, it will allow the price elasticity of energy demand to differ in the short-, medium- and long-run because of the differential effects of carbon and subsidies for renewables on the price of energy; in addition, the model will incorporate the value of public funds raised from carbon taxes. The researchers will use a large data set and different econometric methods to estimate the model and compare it to the results from emission tax policies. The estimates will then be used to analyze recent policy proposals such as the Inflation Reduction Act and the Clean Power Plan. The results of this research project will provide major inputs into policies to reduce carbon emissions, while spurring economic growth and establish the US as a global leader in carbon reduction policies. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.