Climate Policy Options: A Comparison of Economic Performance

Countries are increasingly willing to implement climate policy. However, many countries prefer policy instruments other than carbon pricing. In this paper, we implement carbon taxes, feebates, subsidies and regulation in a computable general equilibrium (CGE) model. This allows quantifying the trade-offs between policy options for the major emitters. We find that in the electricity sector, where technology alternatives are very substitutable, the different policy instruments generate similar outcomes. In the energy-intensive and trade-exposed sectors, where substitution is much more difficult, carbon pricing provides the highest flexibility and thus lowest cost. Further, we provide the first analysis of asymmetric policies, that is the simultaneous use of different policy instruments by the major emitters. Using regulation or subsidies instead of carbon pricing in the electricity sector allows countries to gain small amounts of market shares internationally. Applying regulation to the energy-intensive and trade-exposed sectors, however, backfires by costing regulating countries market shares.