the model, uses labor, capital, intermediate goods, and energy to produce power. By their very nature, energy inputs are interchangeable in production but differ in terms of their carbon intensity. Therefore, in the baseline scenario, production is a mix of fossil fuels and other power generation technologies and it happens to be the case that high-carbon intensive sources like coal are cheaper than low-carbon alternatives. When emission restriction policy is applied, the cost of all types of fuel used in power generation rises as there are no carbon free inputs. However, the rise in input price makes low carbon energy sources relatively cheaper than, say, coal or other high carbon fuels. This change in energy mix of inputs in favor of low carbon fuels derives the economy-wide decline in carbon emissions (Harris et al, 2017; Peters, 2016).

In the model, electricity is an intermediate good whose production cost also depends on the cost of all other inputs including energy. The extent of the price increase will ultimately depend on the elasticity of demand for electricity. In the immediate run, firms will have little time to substitute away from electricity in the face of the price rise, hence demand will likely be inelastic for all intended purposes. Hence, the production of electricity will be increased slightly but the now higher cost of production will be passed through to prices i.e. other sectors buying and final consumers of electricity will face higher prices. Other things remaining constant, expensive electricity leaves less income in the hands of consumers leading to a fall in overall economy-wide demand. On the supply side, increase in the price of electricity demands more resources i.e. with little opportunity to shift away from electricity in the short run, firms now spend more to get the same level of output. This leaves less resources for producing other goods. Hence, one would expect aggregate supply to decline following the rise in electricity price. Reduced output and demand mean lower employment of factors of production like capital, labor, and other intermediate inputs. The decline in total output will not be the same across sectors as the degree to which sectors use electricity differs markedly. Those that use less electricity will see modest change while those that rely on electricity will see noticeable decline in output. The example used so far about the impact of the emission restriction on the power generating sector can be applied to any sector of the economy that is carbon intensive. The qualitative nature of the story will remain the same while the magnitudes will differ across sectors. The basic process of transmission will start with an initial increase in production cost which will be partly passed through to prices and the rest of the economy leading finally to decrease in aggregate demand and supply (Harris et al, 2017; Peters, 2016).

# **Data**

The data source for this paper is the GTAP-POWER data set documented by Peters (2016). The data used in GTAP-POWER come from numerous IEA publications. For example, data on electricity production (in GWh) by fuel source for each region, levelized (i.e., annualized cost per GWh) capital, operating and maintenance (O&M), fuel, and effective tax costs of electricity for select generating technologies and regions are all collected from IEA and then processed and combined with the standard GTAP database. The standard GTAP Data Base is documented in Narayanan et al (2015). Version 9 of the Global Trade Analysis Project (GTAP) model, with 9