The primary objective of this research is to analyze the economic impact of policies designed to reduce emissions of greenhouse gases. As an illustration, a tax on fossil fuel combustion, based on the carbon content of each fuel, could be imposed in order to reduce carbon dioxide emissions. This would induce substitution of other inputs for fossil fuels and increase the relative utilization of fuels such as natural gas with a low carbon content. To model the economic impact of restricting the emissions of greenhouse gases, U.S. economic growth is simulated with and without these restrictions. The model is characterized by three distinctive features: (1) It is highly disaggregated with separate models of production for thirty-five industrial sectors. (2) The behavioral equations of the model are estimated econometrically from an extensive new data base constructed specifically for this purpose. (3) The dynamics of the model are based on intertemporal optimization by households and firms. This project is important because it will begin to give us a better understanding of the behavior of the U.S. economy in response to policies designed to limit the emissions of greenhouse gases.
