Research on a single policy or policy mix in carbon emissions reduction

Abstract

Existing literature on the optimal type of carbon mitigation policy and whether it is better to apply a policy mix instead of a single policy is still unclear. This paper assesses the policy effectiveness under exogenous shocks by applying a dynamic stochastic general equilibrium (DSGE) model. Comparing the differences between the carbon mitigation and economic impacts of a policy mix versus a single policy (carbon tax or carbon trading scheme), the results showed that energy demand is rigid in response to technological shocks. Therefore, there is no significant difference for the energy consumption related carbon emissions in response to the technological progress under three different policy scenarios: a carbon tax (scenario I), a carbon trading scheme (scenario II), and a carbon policy mix (scenario III). Overall, carbon emissions policy has a negative impact on the economy, compared to the other two policies, a carbon trading scheme has a relatively slight impact on the economy. A mandatory carbon price would have a more significant impact than would a market-based carbon price. The policy mix formed by a carbon tax and a carbon trading is comprehensive in terms of both price flexibility and coverage scope.