ECONOMIC MODELING AND THE FALSE TRADEOFF BETWEEN ENVIRONMENTAL-PROTECTION AND ECONOMIC-GROWTH

One important element of the current policy debate on what measures sh ould be taken to reduce greenhouse gas emissions is the controversy ov er the casts of reducing those emissions. ''Top-down'' macroeconomic a nd general equilibrium models give much higher estimates of the costs than ''bottom-up'' models based an microeconomic and engineering data. This paper investigates the causes of the divergence between the two modeling approaches. The conventional top-down models incorporate stro ng implicit assumptions about maximization, technical progress, and or ganizational efficiency that predetermine their results. However these assumptions are questionable on both theoretical and empirical ground s. Economic assessment of policy alternatives would benefit form analy ses that take account of the actual characteristics of business firms and other organizations that emit greenhouse gases in the course of th eir activities.