So far, the paper has focused on the partial equilibrium assessment of a single product, and with a key result that the introduction of an emissions tax or a system of tradable permits pushes up the consumer price and reduces the level of production and consumption of the greenhouse gas-emitting product. In a multi-product or general equilibrium model assessment, consideration of the distributional effects of the policy initiatives should look also at the effects of changes in relative prices. In a multi-product and multiple production methods context, some products and production methods gain and others lose, whereas the partial equilibrium model focuses only on the losers.

For consumers, the relative prices of carbon-extensive products will fall relative to the prices of carbon-intensive products. Then, some of the reduction in consumption of electricity, transport and other carbon-intensive products will be offset by increases in consumption and, in turn, increases in production of such carbon-extensive products as clothing, insulated buildings, public transport, and smaller and more fuel-efficient vehicles and household appliances. Businesses similarly will redirect their choice of production methods to expand on the now relatively cheaper lower carbon-intensive methods such as better-designed and better-insulated buildings, renewable rather than fossil-fuel-based energy, and energy-conservation measures. In a dynamic context, the changed relative prices provide larger incentives and rewards for a new set of innovations based on R&D and investment that economise on the now relatively more expensive carbon-intensive products and production processes. Popp (2006) provides a compelling survey of studies showing a significant and quantitatively important response of induced business R&D and innovation towards energy efficiency and less carbon-intensive energy production methods in response to higher energy prices.

From a general equilibrium perspective, market-based policy interventions to reduce greenhouse gas emissions change the mix of production and consumption in what Schumpeter called ‘creative destruction’ with a much smaller, and perhaps even indeterminate, net effect on aggregate employment, investment and output, although one with fewer greenhouse gas emissions.