Carbon emissions cap or energy technology subsidies? Exploring the carbon reduction policy based on a multi-technology sectoral DSGE model

Abstract As global climate change becomes increasingly severe, energy technology innovation has become a key means of coping with the climate crisis and realizing green and low-carbon development. However, existing literature rarely examines the effects of carbon emission reduction policies based on the perspective of energy technology progress for both short-term economic fluctuations and long-term equilibrium. This paper introduces the fossil energy technology sector and the renewable energy technology sector into the dynamic stochastic general equilibrium (DSGE) model, and compares the effectiveness of the carbon emission cap policy, the fossil energy technology subsidy policy, and the renewable energy technology subsidy policy under the framework of China’s carbon trading market in promoting macroeconomic growth and controlling pollutant emissions. We found that in long-term, the emission reduction effect of the carbon emission cap policy falls short of the other two policies, and subsidizing fossil fuel technologies is more cost-efficient comparatively. The government expenditure shock can all stimulate macroeconomic growth with crowding out of private investment and household consumption, whereas the energy technology research productivity shock leads to a decline in total output and an increase in renewable energy technology demand. In addition, pollutant emissions are pro-cyclical under the impact of total carbon policies and counter-cyclical under the impact of energy technology subsidy policies. This article constructs a multi-technology sectoral dynamic stochastic general equilibrium model, expanding the research perspective and theoretical framework for evaluating carbon emission reduction policies. At the same time, it proves the importance of the government to implement the phased energy technology subsidy policy while implementing the carbon emission cap policy, which provides important enlightenment for the implementation and adjustment of carbon emission reduction policy.