Even though consensus has grown on the need for dramatic reductions in anthropogenic emissions of greenhouse gases (GHGs), which contribute to global climate change, considerable debate continues on which policies would best serve that goal. Many academics argue for carbon taxes as the most efficient domestic and global mechanism (Aldy et al. 2008), but few governments are seriously considering a carbon tax as a primary policy for slowing GHG emissions. Many countries, including those of the European Union, have committed to or are proposing caps on GHG emissions. Other countries, including Canada, are instead pursuing intensity targets, which are also the basis for some prominent proposals to include developing countries in a global framework (Herzog et al. 2006). These targets would index emissions allowance allocations to economic output, the idea being that a flexible mechanism would better allow for economic growth (e.g., Pizer 2005).

How much of a boon is this flexibility? From a policy design standpoint, one could equivalently assign caps that follow a growth path or assign declining intensity targets or carbon taxes to meet a cap. Therefore, a growth path is not an inherent feature of intensity targets, nor is a fixed emissions path a defining characteristic of emissions caps. Furthermore, when the ultimate goal is reducing overall emissions and stabilizing atmospheric concentrations, any policy would have to be ratcheted over time. However, in the face of uncertain economic growth, the policies offer different qualities. Holding expected allocations constant, intensity and emissions targets are likely to provoke different economic responses to unexpected productivity shocks. This paper explores the impacts of such economy-wide emissions regulations on the business cycle.