This paper compares a cap and a tax as instruments in controlling a reduction of greenhouse gas emissions using a multi-sector dynamic stochastic general equilibrium (DSGE) model. The model incorporates two types of fossils and takes into account stochastic variations in sectoral productivity shocks. We …nd that a cap dampens the volatility in the aggregate variables, relative to a tax. However, the tax policy is preferred from the welfare perspective when shocks to the production of fossils are taken into account. These shocks signi…cantly a¤ect the production of not only fossils, but also the other economic sectors. We further …nd that a cap constraint increases the sensitivity of fossils sectors to ‡uctuations in all types of productivity shocks.
