Chapter 20 - Analyzing carbon price policies using a general equilibrium model with household energy demand functions

Abstract

Multisector general equilibrium models are used to simulate the effects of environmental policies on industry output and consumption at disaggregated levels. The specification of household demand in such models often use simpler forms such as constant elasticity of substitution (CES) or linear expenditure systems since there are few estimates of more flexible systems. We estimate a two-stage translog utility function that explicitly accounts for detailed energy expenditures to allow us to capture the price and income effects more accurately than these simpler forms. We incorporate this into a China growth model to simulate the effects of a carbon price to achieve the government targets for the Climate Change (Paris) agreements.