We analyze a recent significant shift in United States (US) climate policy focusing on a landmark law: the Inflation Reduction Act (IRA). To put the IRA in context, we adopt a three-pronged approach. First, we describe the portfolio of economic policies available to address climate change, highlighting their advantages and disadvantages in an intuitive manner. Second, we reflect on US climate policies prior to the IRA and compare them to those of other major players, such as the European Union and China. Third, we offer a quantitative estimation of the IRA's impact on the US economy. We compare the IRA's green subsidies with the effects of a potential carbon pricing policy that achieves the same reduction in CO2 emissions. Our Computable General Equilibrium simulations account for various channels affecting the efficiency of climate policies, indicating that carbon pricing would be a more efficient approach. There are good reasons why both the EU and China and have opted for this mechanism. We highlight the challenges faced by the US and other countries, including those stemming from political feasibility, which hinder quicker advances in the green transition.

Transportation is one of the main contributors to greenhouse gas emissions. Climate regulations on transportation are often a mix of sector-specific regulations and economy-wide measures (such as emission pricing). In this paper we consider how different and partly overlapping climate regulations interact and what are the effects on economic welfare, abatement costs and emissions? Our focus is on Norway, a nation where high taxation of conventional fossil-fuelled cars has paved the floor for another pillar of climate policies: promotion of electric vehicles (EVs) in private transport. Our contribution to the literature is two-fold. First, we analyse the costs and impacts of the partly overlapping climate regulations in transportation—the cap on domestic non-ETS emissions and the goal of all new cars for private households being EVs—focussing on the outcome in 2030. Second, we respond to a gap in the literature through a methodological development in economy-wide computable general equilibrium (CGE) approaches for climate policy by introducing EV technologies as an explicit transport equipment choice for private households. We find that, for the case of Norway, combining a specific EV target with policy to cap emissions through a uniform carbon price more than doubles the welfare costs.

We construct a 45-sector model of Ukraine with Turkey and seven other regions to estimate the impacts on Ukraine of effectively implementing the deep Free Trade Agreement (FTA) it concluded with Turkey on February 3, 2022. Econometric evidence shows that the impacts of Preferential Trade Agreements (PTAs) are much greater than can be explained by tariffs alone. Consequently, we include deep integration in our model, which includes reduction of: (i) Barriers against suppliers of business services including by FDI; (ii) Non-tariff barriers in goods; and (iii) Time-in-trade costs. We innovatively estimate the ad valorem equivalents of the three types of deep integration instruments; and we construct an updated and disaggregated input–output table of Ukraine. Our central model contains foreign direct investment (FDI) in business services with endogenous productivity effects from additional varieties of goods or services in imperfectly competitive sectors. We estimate that a successfully implemented FTA will increase welfare in Ukraine by 2.72 percent, with the deep integration aspects responsible for about 56 percent of the gains; but preferential tariff reduction alone by Ukraine contributes almost nothing. The deep integration and imperfect competition features produce estimated gains 3.5 times larger than a model of perfect competition limited to tariff elimination. Permanent exclusion or very limited access in sensitive sectors, however, reduce the estimated welfare gains to 1.51 percent. Reduction of non-discriminatory barriers against both FDI and Ukrainian investment in business services would add an additional 2.0 percent of real household income to the estimated gains.

Technology policy is the most widespread form of climate policy and is often preferred over seemingly efficient carbon pricing. We propose a new explanation for this observation: gains that predominantly accrue to households with large capital assets and that influence majority decisions in favor of technology policy. We study climate policy choices in an overlapping generations model with heterogeneous energy technologies and distortionary income taxation. Compared to carbon pricing, green technology policy leads to a pronounced capital subsidy effect that benefits most of the current generations but burdens future generations. Based on majority voting which disregards future generations, green technology policies are favored over a carbon tax. Smart "polluter-pays"financing of green technology policies enables obtaining the support of current generations while realizing efficiency gains for future generations.

We theoretically and numerically analyse the impacts for a small, open country with carbon abatement ambitions of joining a coalition with allowance trading. Besides welfare impacts for both the coalition and the small, open economy joining the coalition, we scrutinise how the studied policy options differ with respect to their distributional impacts across domestic income groups. Our example is the EU 2030 policies and Norway’s linking to it. In spite of theoretical ambiguity, the findings suggest that the tighter the links with the EU, the lower the abatement costs for Norway. The distributional profile of the welfare costs tends to be progressive, i.e., the relative (and absolute) incidence of the carbon policy falls more heavily on wealthy households than poor households, regardless of the choice of linking options. However, the less progressive, the lower the overall welfare cost. This indicates a trade-off between efficiency and distribution concerns. A national capand-trade system without linking to the EU is the least cost-effective option for Norway but also the most progressive as the higher income deciles face lower capital return and wages.

Estimamos los efectos micro y macroeconómicos del Brexit utilizando un modelo de equilibrio general aplicado. Simulamos varios escenarios: salida sin acuerdo, permanencia de Reino Unido en la unión aduanera europea, propuesta de Brexit de Boris Johnson, Brexit blando y combinación del Brexit de Boris Johnson con un posible tratado con EE.UU. El modelo incluye heterogeneidad empresarial à la Melitz (2003) y multinacionales en servicios. El impacto para España es limitado, aunque conforme más lejana sea la relación futura (y, en consecuencia, mayores barreras al comercio y a la inversión extranjera directa surjan) el Brexit resulta más dañino.

The role of multinationals in services sectors in the British economy has received little attention in the context of Brexit, even though foreign affiliates sales constitute the most important way of provision of services. We simulate Boris Johnson’s proposal for Brexit to illustrate the effects of barriers to the operations of foreign multinationals in services sectors (both EU multinationals in the UK and UK multinationals operating in the EU). These multinationals operate in a climate of monopolistic competition a la Krugman (1980), which is important to grasp scale economies and variety effects. We also include the impact of barriers to trade across goods and services. The majority of manufacturing sectors include a Melitz (2003) structure, which allows us to grasp the effects along the extensive margin of trade, together with productivity impacts. In addition, we include a specific characterization of unemployment, using a wage curve a la Blanchflower and Oswald (1994a; 1994b, 2005), with which we can estimate the effects of Brexit for employment, for which very few estimates exist. Our model uses the latest GTAP10 database, although we have conducted a forward calibration following Bohringer et al. (2009) to the year 2021, in which the Brexit shock would be implemented. While we offer several macroeconomic results for the UK, the Rest of the European Union, the US and the Rest of the World, we focus on the macro and microeconomic results for the Spanish economy. Beyond Boris Johnson’s proposal, we also analyze other UK alternatives for Brexit to try to illustrate the effects of different policy options. They include not only a soft and hard Brexit but also a Customs Union arrangement, together with an ambitious or modest agreement between the UK and the US, and between the entire EU (including the UK) and the US. Finally, our analysis covers the short run impact together with a steady state simulation following the approach of Francois et al. (2013).

We compare the employment effect of the British Columbia carbon tax using two empirical methods: a reduced-form econometric model and counterfactual simulations conducted using an applied general equilibrium (CGE) model. The comparison allows us to test the theory-driven predictions of the CGE model. It also allows us to test the identification strategy of our econometric model. Ex post, we find statistically and economically significant effects on sectoral employment levels from the carbon tax-with employment falling in the most carbon-intensive sectors and rising in the least carbon intensive. The CGE model predicts employment responses of very similar sign and magnitude to our econometric estimates. We find no evidence to suggest that our econometric estimates are likely to be undermined by general equilibrium effects in this policy setting. Finally, we explore the use of the econometric estimates to deepen the empirical content of the CGE model.

We examine the role of foreign multinationals in service sectors in the context of Brexit, which is assumed to induce an increase in different types of barriers: (a) FDI barriers to multinationals in services; (b) non‐tariff barriers to trade; and (c) import tariffs between the UK and the rest of the EU. We use a state‐of‐the‐art Melitz approach in manufactures with multinationals operating in imperfectly competitive service sectors in a multiregional general equilibrium framework. We find that the increased FDI barriers in services explain about one third of the total welfare loss of Brexit. Furthermore, our decomposition analysis (by introducing each type of barriers separately) shows that the barriers against the EU service multinationals in the UK are harmful to British manufacturing sectors because they face a reduced (and more expensive) supply of intermediate services.

We offer a general-equilibrium analysis of Brexit incorporating the state-of-the-art differences in productivity and firms' selection within manufacturing sectors a la Melitz (Econometrica, 2003, 71, 1695) and multinationals in services. Our results suggest that trade, output and average productivity diminish across most sectors in the UK and the Rest of the European Union (REU), as well as GDP, welfare, wages and capital remuneration. However, the UK loses more due to the missing preferential access to the huge EU market. Significant welfare losses along the extensive margin occur in the UK due to the lost imported varieties produced by highly productive European firms. These cannot be compensated by the new varieties of less productive domestic firms that enter the British market due to increased protectionism and reduced import competition. In addition, the emergence of barriers against multinationals, which is often ignored in previous studies, explains approximately one third of the negative effect in both the UK and REU. Furthermore, we show that the Brexit impact is about only half if we do not include both foreign direct investment barriers and Melitz structure. Thus, previous studies without these important model features would underestimate the Brexit impact significantly.

This paper examines the efficiency and distributional impacts of introducing a price floor in an emissions trading system (ETS) when environmental regulation is partitioned. We theoretically characterize the conditions under which a price floor enhances welfare. Using a multi-country multi-sector numerical general equilibrium model of the European carbon market, we find that moderate minimum price levels in the EU ETS can reduce the costs of EU climate policy by up to thirty percent and yield outcomes close to uniform carbon pricing. Moreover, most of the EU Member States would gain. Our results are robust with respect to parametric uncertainty in production and consumption technologies.

A country choosing to adopt border carbon adjustments based on embodied emissions is motivated by both environmental and strategic incentives. We argue that the strategic component is inconsistent with commitments under the General Agreement on Tariffs and Trade (GATT). We extend the theory of border adjustments to neutralize the strategic incentive, and consider the remaining environmental incentive in a simplified structure. The theory supports border adjustments on carbon content that are below the domestic carbon price, because price signals sent through border adjustments inadvertently encourage consumption of emissions intensive goods in unregulated regions. The theoretic intuition is supported in our applied numeric simulations. Countries imposing border adjustments at the domestic carbon price will be extracting rents from unregulated regions at the expense of efficient environmental policy and consistency with international trade law.

This paper examines 12 economic simulation models that estimate the impact of Brexit. We provide their range of results and explain their associated assumptions and methodologies (macroeconometric models, computable general equilibrium [CGE] models, or mixed approaches). CGE models simulate the operation of market economies, solving for changes in equilibrium prices and quantities (production, employment, demand, and international trade) for all sectors in the economy. Macroeconometric models focus on economic aggregates and macro shocks, such as interest rates, the exchange rate, inflation, risk, uncertainty, and government expenditure/revenue. Most of the studies find adverse effects for the UK and the EU-27. The UK's GDP losses from a hard Brexit (reversion to World Trade Organization rules due to a lack of UK-EU agreement) range from –1.2 to –4.5 percent in most of the models analyzed. A soft Brexit (e.g., Norway arrangement, which seems in line with the nonbinding text of the political declaration of November 14, 2018 on the future EU-UK relationship) has about half the negative impact of a hard Brexit. Only two of the models derive gains for the UK after Brexit because they are based on unrealistic assumptions. We analyze more deeply a CGE model that includes productivity and firms' selection effects within manufacturing sectors a la Melitz (2003) and the operations of foreign multinationals in services. Based on this latest model, we provide a complete overview and explanation of the likely economic impact of Brexit on a wide range of macroeconomic variables, namely GDP, wages, private consumption, capital remuneration, aggregate exports, aggregate imports, and the consumer price index. The data underlying this analysis are available at https://piie.com/system/files/documents/wp19-5.zip.

Almost all economic assessments of Brexit conclude that there would be significant losses for both the UK and the EU. This paper examines the driving forces behind these results. We consider the strong economic relationships between the UK and EU both at the sectoral and macroeconomic levels that are at risk from Brexit. We review fifteen studies that explore various Brexit scenarios (hard and soft) and explain why their different methodologies and assumptions yield different degrees of economic damage. Our review concludes that GDP losses for the UK from a hard Brexit range from 1.6% to 7.8%, while a soft Brexit would moderate the losses by roughly half. We also find that potential UK trade agreements with third countries could partially compensate for significant Brexit losses.

This paper examines the lifetime and intergenerational economic incidence of renewable energy (RE) subsidies and carbon pricing for climate change mitigation, employing a calibrated dynamic general-equilibrium model with overlapping generations for the U.S. economy. We explore the political economy implications of the different regulatory approaches based on majority voting of generations alive at the time the policy is introduced. We emphasize issues for policy design focusing on the financing of RE subsidies and policy interactions with distortionary income taxation. Notwithstanding the supremacy of carbon pricing on grounds of aggregate efficiency, we find that smart designs for RE support policies, which link the financing of the support for RE technologies to the carbon intensity of fossil-based energy technologies, constitute a politically viable option.

The Transatlantic Trade and Investment Partnership (TTIP) has been one of the most heavily debated issues in international economics over the last few years. We analyze its potential impact on the world, including both insiders and outsiders of the agreement, using a Computable General Equilibrium (CGE) model with Foreign Direct Investment (FDI) under imperfect competition. In our simulation, TTIP consists of reductions of tariffs, non-tariff barriers and barriers to FDI. Our results show that the FDI component, which has often been neglected in previous studies, would contribute to nearly half of the overall impact of TTIP for the US and nearly one third for the EU. Insiders would heavily benefit from TTIP, whereas, it would be slightly negative for outsiders (Middle East, Sub-Saharan Africa, Latin America, Southeast Asia and Other Advanced Countries), except for the big Asian economies (China, Japan and India), which would remain unaffected. The slightly negative effects would turn into positive with an “inclusive TTIP” (i.e., one avoiding third country discriminating rules and standards). An inclusive TTIP would benefit both insiders, who would gain more than with the standard TTIP, and outsiders, who would be better off than without the TTIP. Welfare, GDP, wages, as well as aggregate imports and exports of the world economy would clearly increase following either a modest or ambitious TTIP agreement. Our results suggest that policy makers should resume TTIP negotiations and try to strike an inclusive and ambitious deal.

We examine regional and unilateral policies to reduce three kinds of trade costs in Eastern and Southern Africa. Our article is the first CGE-microsimulation model to assess the impacts of the reduction of trade costs on poverty and income of the poorest 40% of the population. We estimate significant reductions in the poverty headcount and increases in income for the poorest 40%. We find that trade facilitation would increase the 'share' of income of the poorest 40% of the population, however, services reform decreases the share. We find and explain why our three types of trade costs have very diverse impacts across the countries.

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