CoPS/IMPACT Working Paper Number G-247

Title: Climate Change Mitigation, Economic Growth and the Distribution of Income

Authors: G.A. Meagher, P.D. Adams and Felicity Pang


In October 2008, the Australian Government released a major report: Australia's Low Pollution Future: The Economics of Climate Change Mitigation. In that report, various scenarios are used to explore the potential economic effects of climate mitigation policy in Australia. One of the scenarios, designated CPRS-5, a Carbon Pollution Reduction Scheme (CPRS) aims to reduce emissions to 5 per cent below 2000 levels by 2020. It is consistent with stabilisation at around 550 parts per million of carbon dioxide equivalent (ppm CO2-e) in the atmosphere by 2100.

In assessing the likely effects these policies on the future growth of output and employment by industry, the Government's report relies mainly on economic modelling using the MMRF applied general equilibrium model of the Australian economy. Results are reported for 58 industries. This paper begins by using the same model to closely reproduce the analysis of the CPRS-5 scenario conducted for the report. However, this time the MMRF model is enhanced by a labour market extension MLME which allows the employment results to be extended to 81 occupations and 64 skill groups. The enhanced model is then used in a top-down configuration with an income distribution extension MIDE and a microsimulation extension MMSE to generate changes in income.

In MIDE, income redistributions between households (taken collectively), corporate trading enterprises, financial trading enterprises, the government and foreigners (the 'institutions') are modelled by the inclusion of the associated current and capital accounts from the Australian System of National Accounts. Within the household sector, changes in disposable income from unincorporated enterprises (differentiated by 17 industries), compensation of employees (differentiated by 81 occupations), property income, and net transfers from other institutions are separately modelled. On the income side, one hundred types of recipient are identified corresponding to personal income percentiles. On the expenditure side, six hundred types of household are identified, this time differentiated by household income and the ages of its members. This arrangement allows changes in real income to be computed using household specific CPIs.

The microsimulation extension MMSE uses MIDE results to update the incomes of more than 13,500 persons. The effects of the climate change mitigation policies on the incomes of various socio-economic groups are then be obtained by aggregation.

JEL classification: C68, D31, D58, J23, O56, Q52.

Keywords: CGE modelling, climate change mitigation, distribution of employment, distribution of income, microsimulation.

Working Paper Number G-247 can be downloaded in PDF format.

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