Why Previous Estimates of the Cost of Climate Mitigation are Likely Too Low

Computable general equilibrium (CGE) models have been heavily utilized in analyses of the costs of Greenhouse Gas mitigation policies. This is in large part due to their ability to simulate potential impacts of prospective economic policies taking into inter-sectoral and international interactions. Although CGE models have received heavy usage; they are often criticized as being insufficiently validated. Key parameters are often not econometrically estimated, and the performance of the model as a whole is rarely checked against historical outcomes. As a consequence, questions frequently arise as to how much faith one can put in CGE results. Our findings indicate that many earlier CGE-based studies may have understated the cost of meeting these targets by overstating the price elasticity of demand for energy. These results suggest that we must revisit the cost of climate policies in light of newly validated CGE models.