Environmental and Resource Economics

, Volume 64, Issue 1, pp 81–107 | Cite as

Substitutability and the Cost of Climate Mitigation Policy

  • Yingying Lu
  • David I. Stern


We explore how and by how much the values of elasticities of substitution affect estimates of the cost of emissions reduction policies in computable general equilibrium (CGE) models. We use G-Cubed, an intertemporal CGE model, to carry out a sensitivity and factor decomposition analysis. The decomposition analysis determines the contributions of changes in average abatement costs and changes in baseline emissions to the change in total mitigation costs. The latter has not previously been considered. Average abatement cost rises non-linearly as elasticities are reduced. Changes in the substitution elasticities between capital, labor, energy, and materials have a greater impact on mitigation costs than do inter-fuel elasticities of substitution. The former have more effect on business as usual emissions and the latter on average abatement costs. As elasticities are reduced, business as usual emissions and GDP growth also decrease so that there is not much variation in the total costs of reaching a given target across the parameter space. Our results confirm that the cost of climate mitigation policy is at most a few percent of global GDP.


Elasticity of substitution Mitigation policy CGE models G-Cubed Sensitivity analysis Decomposition analysis 

JEL Classification

Q54 Q58 C68 



We thank the Australian Research Council for providing funding under grant DP120101088 ‘Energy Transitions: Past, Present, and Future” and Warwick McKibbin and Peter Wilcoxen for allowing us to use the G-Cubed model in this project. We also thank Frank Jotzo for much helpful advice, and participants at the Australian Agricultural and Resource Economics Society annual conference in Port Macquarie, NSW and two anonymous referees for useful comments.

Compliance with ethical standards

Conflicts of interest

We received funding from the Australian Research Council and have no conflicts of interest.


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Copyright information

© Springer Science+Business Media Dordrecht 2015

Authors and Affiliations

  1. 1.School of EconomicsShanghai UniversityShanghaiChina
  2. 2.Crawford School of Public PolicyThe Australian National UniversityActonAustralia

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