Interaction of Carbon Reduction and Green Energy Promotion in.pdf

Interaction of Carbon Reduction and Green Energy Promotion in a Small Fossil-Fuel Importing Economy RÜDIGER PETHIG CHRISTIAN WITTLICH CESIFO WORKING PAPER NO. 2749 CATEGORY 10: ENERGY AND CLIMATE ECONOMICS AUGUST 2009 An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePE • from the CESifo website: Twww.CES/wpT CESifo Working Paper No. 2749 Interaction of Carbon Reduction and Green Energy Promotion in a Small Fossil-Fuel Importing Economy Abstract We study the incidence of carbon-reduction and green-energy promotion policies in an open fossil-fuel importing general equilibrium economy. The focus is on mixed price-based or quantity-based policies. Instruments directed toward promoting green energy are shown to reduce also carbon emissions and vice versa. Their direct effects are stronger than their side effects, the more so, the greater is the elasticity of substitution in consumption between en- ergy and the consumption good. We calculate the effects of variations in individual policy parameters, especially on energy prices and welfare costs, and determine the impact of exoge- nous fossil-fuel price shocks on the economy. JEL Code: Q42, Q43, Q48, Q54. Keywords: carbon reduction, green energy promotion, policy mix, interaction of policies. Rüdiger Pethig Christian Wittlich University of Siegen University of Siegen Department of Ec