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Static vs. dynamic double dividends: theory and taxonomy

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The purpose of this paper attempts to increase the level of rigor in the discusion of so-called "double-dividends". The authors introduce an important distinction between double dividends (DDs) in a comparative static (actually quasi-static) framework, and double dividends in a dynamic framework. the former category includes comparisons between hypothetical situations differing only in terms of responses to fiscal or other govermental policy, without allowing for technological responses. In all of these cases, it is assumed that the reference point is significantly sub-optimal, ie not on the efficiency frontier. The second category comprises comparisons not between situations, but between alternative development scenarios where different policy packages result in different rates and directions of technological progress, and consequently, different economic growth rates and environmental impacts. Dynamic double dividends may exist even when the reference point is initially on the efficiency frontier. The paper also derives some important implications for economic modelling. One such implication is that conventional general equilibrium models (CGEs), which suggest a single unique optimal path based upon a simple extrapolation of current technology, cannot be used to identify or quantify a dynamic double dividend. This is a major weakness of such models for long-term policy assessment, such as greenhouse gas (GHG) policy.

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