The literature on the effects and the effectiveness of (unilateral) climate policy measures has so far relied heavily on work based on computable general equilibrium models (CGEs) and integrated assessment models building on these. While these models are strongly inspired by theoretical economic work and do an excellent job in integrating climatological insights, their calibration and numerical implementation are often based on ad hoc parameterizations drawn from separate pieces of evidence. Moreover, key economic relationships are typically not micro-founded but used in a reduced form format. This is, amongst other things, true for the modelling of international competitiveness effects that arise from unilateral climate policies, or the feedback effects of those policies on supply behaviour of resource owners. Estimates from the empirical literature do not always address the informational requirements of CGE modellers nor do they necessarily reflect restrictions that underlie the theoretical model. As a consequence, there is substantial uncertainty over the results of CGE simulations.
In other fields of applied economic work, e.g., in the area of international trade, researchers have recently developed methods to use structural relationships consistent with theoretical models to econometrically identify the parameters of the models. This ensures that the theoretical and the empirical setups are compatible. In this research project, we build on this literature. The objective is to integrate structural estimation and proper econometric identification, based on sound theory-based and micro-founded relationships into the CGE climate policy framework. We bring together researchers with theoretical, empirical, and simulation-related backgrounds to ensure an integrated, internally consistent approach that carries substantial promise for the development and improvement of models used in applied policy work.
A key prerequisite for the success of this endeavour lies in the availability of comparable data on various policies that regulate, tax, or subsidize the production and use of different types of energy. Lack of comparable data has so far greatly hampered empirical work. A second important step lies in working out extensions to a major workhorse model for climate policy analysis – the FUND model – so that a structural empirical estimation of behavioural economic relationships becomes possible. In a third step, the project team uses their framework to gain novel insights on the effects and effectiveness of existing unilateral climate policies, as well as the assessment of new proposed policies.
The key tasks of the project are:
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