The potential for reducing carbon emissions from increased efficiency : a general equilibrium methodology

Abstract

This paper presents a methodology for analyzing the potential for reduction in carbon emissions through increased fuel efficiency and provides an illustration of the method. The methodology employed is a multisectoral, intertemporal, programming model embodying significant non-linearities in production and consumption. The first set of experiments embody the analysis of the potential resulting from completely costless improvements in efficiency in the use of fuels in several sectors. Because of the improvements in fuel efficiency, the required reductions in carbon emissions always have a less depressing effect on economic performance than would otherwise be the case. Nonetheless, as the carbon emissions constraints become more restrictive, economic performance declines substantially. The next set of experiments show the effects of fuel efficiency improvements in the adjustments to carbon emissions constraints, where such improvements now require additional capital. It is clear that exploitation of the option of retrofitting capital in adjusting to carbon emissions constraints improves the overall economic performance of the economy. The demonstration of nonlinearity in the economic impact of carbon emission constraints appears to be a robust outcome.