Net Economic Benefits from Shifting Consumption, Labor Elasticity, and Productivity Gains During an Accelerated Renewable Energy Transition in China

China is the world’s largest greenhouse gas (GHG) emitter, but declining wind and solar energy costs present opportunities to transform its electric power sector. In 2017, China launched a national emission trading scheme (ETS). Evidence to date suggests that the ETS mitigates CO2 emissions and promotes renewable energy deployment but constrains economic growth. These studies, however, do not account comprehensively for economic impacts. Ours is the first to account for three multiplier effects—shifting consumption patterns, job growth with elastic labor supply, and higher total factor productivity (TFP)—when modeling accelerated renewable electricity growth with the ETS in China. Results from a detailed economic forecasting model show low renewable energy costs interacting with the ETS to slash GHG emissions while directly stimulating incremental net positive economic growth by 2030, compared with a business-as-usual scenario that assumes slower renewable cost reductions and no ETS. Accounting for the multiplier effects reveals larger potential benefits, including up to 15.6% of additional GDP growth (over business as usual) by 2030 when shifting consumption patterns, job growth with elastic labor supply, and higher TFP are all considered. These results suggest that China should accelerate its clean energy transition, not only for the air-quality and climate benefits, but also for the broad and positive impact on innovation, employment, and economic growth.

Endogenous Tradability, International Relative Prices, and the International Transmission of Business Cycles

This paper propose a two-country, dynamic, stochastic, general equilibrium (DSGE) model with endogenous tradability, product differentiation, variously determined physical capital, and an elastic labor supply to explore the propagation of business cycles across countries. The model successfully addresses international relative price dynamics (its appreciation with positive home productivity shock, called the ‘Harrod-Balassa-Samuelson Effect’) through the entry of producers and their cut-off productivities of exporting. The use of endogenous physical capital in the model induces a more realistic framework since the simulated model is compared to the U.S. investment data that covers spending on capital equipment, structures and inventories for producers’ entry and exit dynamics. Building the model with endogenous capital and elastic labor supply weakens the volatility of investment compared to conventional international real business cycle (IRBC) models. The model also accounts for several features of the data, such as the volatility of aggregate variables and their correlations with GDP.

ENDOGENOUS GROWTH AND HOUSEHOLD LEVERAGE

We add households with heterogeneous discount factors and constrained credit to a research and development (R&D)-based endogenous growth model. Borrowers' access to credit has profound implications for growth. The direction and magnitude of this effect depend on preferences over labor supply. If labor supply is highly elastic and households do not smooth their labor supply between labor that produces output and R&D, annual growth decreases from 11.6% to approximately zero as the debt-to-capital ratio rises from 0 to 1.38. If households instead have a strong preference for smoothing their labor supply, then growth increases from 2.91% to 3.83% as the debt-to-capital ratio rises from 0 to 1.55. In both cases, less elastic labor supply weakens these effects. The results are similar if existing ideas do not affect the creation of new ideas. Now, when households do not smooth their labor supply, less debt results in faster growth, and productivity and output converge to much higher values.

Methods

Chapter 8 concludes the text with methodical remarks. It defends key assumptions made in the main text and compares them, to the extent they deviate, with more conventional premises. The chapter starts with a comparison of adaptive versus rational expectations. Thereafter, it contrasts infinite planning horizons, finite planning horizons, and overlapping generations models. The third section, which is devoted to modeling money, discusses money-in-the-utility, the transaction costs approach, and more recent theories that derive money demand from a microeconomic framework. The forth section shows that assuming a highly elastic labor supply is empirically unconvincing, whereas a constant labor supply simplifies the model greatly and appears as a reasonable approximation. The final section contrasts behavioral and choice theoretic approaches to price setting.