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

As global climate change intensifies, energy technology innovation is central to achieving green, low‑carbon development. This paper augments a New Keynesian DSGE model by explicitly incorporating fossil energy technology and renewable energy technology sectors and compares three carbon reduction policies under China’s carbon trading framework: a carbon emission cap, fossil energy technology subsidies, and renewable energy technology subsidies. We find that, in the long run, a carbon emission cap reduces emissions less effectively than either subsidy policy, and subsidizing fossil fuel technologies is more cost‑efficient. Government expenditure shocks stimulate macroeconomic growth but crowd out private investment and consumption, while an energy technology research productivity shock reduces total output and increases renewable energy technology demand. Furthermore, pollutant emissions are pro‑cyclical under total carbon cap shocks and counter‑cyclical under energy technology subsidy shocks. The model expands the theoretical framework for evaluating carbon reduction policies and underscores the importance of phased energy technology subsidies alongside a carbon cap, offering insights for policy implementation and adjustment.

Jianping Gu, Yi Li, Jingke Hong, Lu Wang