Unemployment Effects of Climate Policy

This paper models the unemployment effects of restrictions on greenhouse gas emissions, embodying two of the most significant types of short term economic imperfections that generate unemployment: sectoral rigidities in labor mobility and sectoral rigidities in wage adjustments. A labor policy is also analyzed that would reduce the direct negative economic effects of the emissions restrictions. The politics of limiting greenhouse gas emissions are often dominated by relatively short term considerations. Yet the current economic modeling of emissions limitations does not embody economic features that are likely to be particularly important in the short term, in particular, the politically sensitive unemployment rate. Moreover, only a few of these studies also consider policies that would offset the negative direct economic effects of emissions restrictions. For plausible estimates of the parameters, the model shows that, with the labor market imperfections, if there were no offsetting policies, the reductions in GNP in the U.S. in the first ten years after emissions restrictions were imposed would be as much as 4 per cent. However, if there were two policies, instead of just one: a counteracting labor market policy, as well as the emissions restrictions, the negative direct economic effects could be completely eliminated.