The economic cost of mandatory CO2 emission cuts: A reduced-form approach with panel data: Working paper series--12-04

We follow Schmalensee, Stoker, and Judson (1998) to forecast CO2 emissions based on the Environmental Kuznets Curve (EKC). Our findings suggest that the EKC will not lead to significant decreases in CO2 emissions by 2050 for countries with the highest incomes. Therefore, mandatory emissions cuts may be required to limit climate change. Consistent with Horowitz (2009) and Ng and Zhao (2010), we use a reduced-form approach to estimate the economic costs of mandatory emission cuts. Based on our parameter estimates, we find that a 25% mandatory reduction in CO2 emissions from 1990 will lead to a 5.63% decrease in the combined GDP of 19 high-income OECD countries, and a 40% reduction will result in a 12.92% loss in income (holding other relevant variables constant)! Our estimates are substantially higher than those in Paltsev, Reillya, Jacobya, and Morris (2009) and Dellink, Briner and Clapp (2010), and suggest that the economic cost to limit climate change as envisioned in the Copenhagen Accord may be substantial. More research should be done before mandatory emission cuts are implemented.