Growth effects of carbon policies: Applying a fully dynamic CGE model with heterogeneous capital

The paper develops a new type of computable general equilibrium (CGE) model in which growth is fully endogenous, based on the increasing specialization of sector-specific capital varieties. The model is used to simulate the effects of carbon policies on consumption, welfare, and sectoral development in the long run. The benchmark scenario is calculated based on endogenous sector-specific gains from specialization, which carry over to the simulations of a carbon policy following the 2°C target. Applying the model to the Swiss economy, we find that carbon policy leads to growth rates of knowledge intensive sectors that are higher than in the benchmark and that all the non-energy sectors show positive growth rates. Compared to a state in which climate change has no negative effect, consumption in 2050 is reduced by 4.5% and entails a moderate but not negligible welfare loss.