Essays in environmental macroeconomics

This thesis contains three essays aiming to analyze from different perspectives the role of the environmental policy in shaping economic dynamics. In this contest, environmental policy refers to the actions undertaken by public authorities in order to reduce the level of greenhouse gas emissions and contrast the global warming. The essays presented in this work have specific research objectives but, on the methodological side, they share a common feature represented by a dynamic general equilibrium modeling. In particular, the first and the second essays develop two dynamic stochastic general equilibrium models with several sources of uncertainty, in order to simulate the business cycle under different environmental policy regimes. In the former, business cycle simulation is used to conduct a positive analysis that aims at describing the optimal choices of the agents in presence of uncertainty and environmental constraints. In the latter, the computation of the impulse response functions allows to develop a normative analysis identifying the optimal monetary policy responses to specific productivity shocks. The third essay develops a deterministic model describing an economy without uncertainty. In this case, the deterministic framework is used to simulate and evaluate the effects of the introduction of long-run structural policies. The contents of each essay are summarized in what follows. The first essay develops a New-Keynesian model with clean and pollutant electricity producers in order to analyze the economic dynamics generated by different productivity shocks under three environmental policy regimes: i) no policy; ii) cap-and-trade; iii) emissions tax. Specifically, in the no policy regime there is no environmental regulatory interventions adopted by the authorities. In the cap-andtrade regime an emission permits market is implemented and in the emissions tax regime the authorities levy a fixed tax per each unit of emissions. For what concerns the source of uncertainty, there are three stochastic processes governing the productivity of intermediate goods firms and that of clean and pollutant electricity producers respectively. The impulse response functions show that the dynamics of the level of emissions depends on the type of productivity shock, highlighting the importance to include the electricity producers in the analysis. In particular, a positive shock in the productivity of clean electricity producers associated with a high elasticity of substitution between pollutant and clean electricity determines a decoupling between output growth and emissions. Decoupling occurs since agents find optimal to take advantage from the productivity improvement substituting pollutant with clean electricity. The higher the elasticity of substitution, the greater the amount of clean electricity used in production resulting in a stronger decoupling effect. A positive total factor productivity shock raises the demand of total electricity and fosters investments in both the pollutant and the clean electricity sector while a positive productivity shock in the pollutant electricity sector enhances the growth of pollutant electricity and reduces the production in the clean sector. In both cases, under the no policy and the emissions tax regimes, emissions grow sharply due to the simultaneous increase in output and pollutant electricity. Furthermore, the cap-and-trade regime dampens the responses of output, consumption and investments through the variation of the emission permits price that affects production costs. In the second essay, the previous model is extended to analyze the optimal monetary policy conducted by a Ramsey planner under the different environmental policy regimes. This work explores the possible interactions between monetary and environmental policy seeking to understand the role of environmental regulation in influencing the monetary policy conduct. The main findings are listed in what follows. Regardless the source of uncertainty, a fixed emissions tax does not change the optimal intertemporal decisions of the agents. Accordingly, the Ramsey planner has no need to modify its monetary policy conduct respect to the case in which no environmental regulation is adopted. On the contrary, a cap-and-trade scheme changes the magnitude or even the sign of the responses of the Ramsey planner depending on the type of productivity shock affecting the economy. Specifically, a positive total factor productivity shock induces the Ramsey planner to foster investments increasing the nominal interest rate. However, since the cap-and-trade scheme sets a maximum level for emissions, the planner finds optimal to restrain the increase in the nominal interest rate respect to the no policy case, in order to lower investments growth, slow down the production of pollutant electricity and comply with the cap. For the same reason, when a positive productivity shock in the pollutant electricity sector occurs, the Ramsey planner is even forced to reverse its monetary policy stance and decrease the nominal interest rate in order to avoid an excessive investment in this sector. Finally, the work presented in the third essay stems from my collaboration to a research project developed by the Italian Ministry of the Economy and Finance and Sapienza Università di Roma. The project arose from the need to endow Italian Government with a quantitative tool able to analyze the effects of different emissions reduction interventions on the economic activity. The essay describes the model built to fulfill this need, namely the General Equilibrium Environmental Model (GEEM) and is the result of the joint work of the members of the GEEMproject team: Barbara Annicchiarico, Susan Battles, Fabio Di Dio, Pierfrancesco Molina and Pietro Zoppoli. GEEM can be included in the class of New-Keynesian dynamic general equilibrium models embedding several rigidities and distortions arising from the lack of perfect competition. Contrary to many models developed in the macroeconomic environmental literature that consider the level of emissions as a byproduct of output only, GEEM distinguishes three different sources of emissions: output production, electricity production and consumption of fuels used in transportation. This specification displays one of the main innovations of the model and allows to include in the analysis a grater variety of climate and energy policies, e.g. the interventions focused to increase the share of electricity generated from renewable sources or the increase in gasoline excises. The model is used to simulate nine environmental policy and one energy-price shock scenarios. Specifically, policies are classified in four categories according to the type of intervention they involve. The first category includes policies setting the emissions cut targets to be accomplished by specific time periods, the second and the third include fiscal and market liberalization policies and the fourth includes structural policies aimed at improving economic efficiency. Finally the last scenario is dedicated to the simulation of energy-price shocks