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Optimal environmental policy and business cycles: An analysis using an E2-DSGE model

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  • de Lima e Silva, Yuri Cesar
  • Silva, Marcelo E.A.

Abstract

What are the effects of adopting a comprehensive environmental policy that considers, in addition to taxes on emissions, taxes and subsidies in the energy sector? This paper answers that question using a dynamic stochastic general equilibrium model augmented to include environmental issues and an energy sector featuring non-renewable and renewable energy production. The model is used to find the optimal trajectories of the environmental policy instruments and to analyze the dynamic behavior of the model variables in response to productivity shocks. First, we show that tax and subsidy rates are procyclical. Second, we show that having access to alternative sources of (renewable) energy allows households and firms to replace non-renewable (polluting) energy sources with renewable (cleaner) energy sources in response to productivity shocks. Finally, a welfare analysis of different policy alternatives shows that a broad environmental policy is welfare superior to policies that do not include a full set of taxes and subsidies in the energy sector.

Suggested Citation

  • de Lima e Silva, Yuri Cesar & Silva, Marcelo E.A., 2024. "Optimal environmental policy and business cycles: An analysis using an E2-DSGE model," Renewable Energy, Elsevier, vol. 237(PC).
    • Handle: RePEc:eee:renene:v:237:y:2024:i:pc:s0960148124017646
    DOI: 10.1016/j.renene.2024.121696
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    More about this item

    Keywords

    Business cycle; Environmental policy; E-DSGE; Ramsey policy;
    All these keywords.

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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