The synthesis of bottom-up and top-down approaches to climate policy modeling: Electric power technologies and the cost of limiting US CO2 emissions

In the US, the bulk of CO2 abatement induced by carbon taxes comes from electric power. This paper incorporates technology detail into the electricity sector of a computable general equilibrium model of the US economy to characterize electric powerʹs technological margins of adjustment to carbon taxes and to elucidate their general equilibrium effects. Compared to the top-down production function representation of the electricity sector, the technology-rich hybrid specification produces less abatement at a higher welfare cost, suggesting that bottom-up models do not necessarily generate lower costs of abatement than top-down models. This result is shown to be sensitive to the elasticity with which technologies’ generating capacities adjust to relative prices.