Don Fullerton
Don Fullerton wonders whether some analytical modelling can be used to better understand the results of CGE models: Can we build a “model of the model”? With regard to a unilateral carbon restriction in one sector or one region, a common concern is that one sector’s abatement will be offset by “leakage”, the increase in pollution elsewhere. Many large CGE models have been used to simulate the effects of unilateral climate policy, and they all find a particular number for leakage that might be, for example, 20 percent of the abatement achieved. But, which of the many features of that CGE model are really driving that result? What are the key parameters?
In a working paper called “Negative Leakage”, Mr Fullerton (with D. Karney and K. Baylis) demonstrates a substantial negative effect on leakage, using a very standard analytical general equilibrium model with only two competitive sectors that each use carbon and one other input, with constant returns to scale. Then a carbon tax always raises costs in that sector. They derive expressions that show exactly when the negative effect on leakage could swamp the positive effect, such that global carbon emissions fall by more than in the taxed sector.
Don Fullerton received his PhD in Economics from U.C. Berkeley in 1978. He taught at Princeton University, the University of Virginia, Carnegie Mellon University and the University of Texas before joining the University of Illinois in 2008. From 1985 to 1987, he served in the U.S. Treasury Department as Deputy Assistant Secretary for Tax Analysis.
At the University of Illinois, he is Gutgsell Professor in the Finance Department, Center for Business and Public Policy, and Institute of Government and Public Affairs. He was Managing Editor for the B.E. Journal of Economic Analysis & Policy (2001-2012), and is Director of the National Bureau of Economic Research (NBER) program on Environmental and Energy Economics (2007-present).