Publication Type

Journal Article

Version

acceptedVersion

Publication Date

8-2023

Abstract

Environmental policy research has increased due to stricter policies aligned with climate goals. However, to achieve the goal of net-zero emissions, the adoption of even stronger policies and increased carbon taxes is necessary, with transition risk becoming a major concern for companies. Even though governments worldwide have been employing a range of methods such as carbon tax, cap-and-trade, and intensity targets to mitigate the impact of climate change, a pivotal debate around determining the optimal policy that reduces emissions without harming the economy continues. Our paper delves into the environmental policy assessment emphasizing the role of endogenous capital utilization rates, which have hitherto been largely disregarded in literature. We study how endogenous capital utilization rate affects the transmission mechanism of economic shocks and the optimal environmental policy choice. To evaluate the quantitative impact of the transmission mechanism, we introduce distinct features to the environmental-dynamic stochastic general equilibrium (E-DSGE) model, including endogenous capital utilization, time-varying depreciation of capital, and environment quality shocks. We find that the complementarity between energy and capital leads to an amplification effect of the conventional transmission mechanism. Our model with these ingredients ranks any carbon tax below 25% as the best policy in terms of welfare improvement.

Keywords

E-DSGE model, Environmental policy, Capital utilization rate, Energy price, Welfare analysis

Discipline

Business Law, Public Responsibility, and Ethics | Environmental Policy | Finance and Financial Management

Publication

Journal of Cleaner Production

Volume

414

First Page

1

Last Page

14

ISSN

0959-6526

Identifier

10.1016/j.jclepro.2023.137640

Publisher

Elsevier

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1016/j.jclepro.2023.137640

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