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Politics and Economics of Second-Best Regulation of Greenhouse Gases: The Importance of Regulatory Credibility

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  • Valentina Bosetti
  • David G. Victor

Abstract

Compared with economically ideal policies, actual limits on global warming gases are likely to be "second-best" in many ways. Most studies focus on "second-best" approaches such as delaying emission controls in developing countries, constraining international emission trading, or regulating gases piecemeal by sector rather than equally across the whole economy. We show that another second-best approach--lacking of regulatory credibility--imposes up to six times the extra costs on the economy when compared with all other "secondbest" factors combined. When regulatory rules are not believable then firms and other agents become short-sighted and unable to make optimal investments in research and development as well as long-lived technologies. Although analysts have largely ignored this issue, low credibility is commonplace when governments tackle international problems because international institutions such as treaties are usually weak and fickle. Governments can help solve credibility problems with strategies such as "pre-committing" regulations into domestic law that is usually more credible than international commitments. We show that China, for example, can justify unilateral, emission controls because such pre-commitment would encourage Chinese firms to invest with a clearer eye to the future.

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Bibliographic Info

Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): Volume 32 (2011)
Issue (Month): Number 1 ()
Pages: 1-24

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Handle: RePEc:aen:journl:2011v32-01-a01

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  1. Joseph E. Aldy & William A. Pizer, 2011. "The Competitiveness Impacts of Climate Change Mitigation Policies," NBER Working Papers 17705, National Bureau of Economic Research, Inc.
  2. Massimo Tavoni & Valentina Bosetti & Carlo Carraro, 2009. "Climate Change Mitigation Strategies in Fast-Growing Countries: The Benefits of Early Action," Working Papers 2009.53, Fondazione Eni Enrico Mattei.
  3. Valentina Bosetti & Carlo Carraro & Massimo Tavoni, 2008. "Delayed Participation of Developing Countries to Climate Agreements: Should Action in the EU and US be Postponed?," CESifo Working Paper Series 2445, CESifo Group Munich.
  4. Valentina Bosetti & Carlo Carraro & Alessandra Sgobbi & Massimo Tavoni, 2008. "Modelling Economic Impacts of Alternative International Climate Policy Architectures.A Quantitative and Comparative Assessment of Architectures for Agreement," CESifo Working Paper Series 2417, CESifo Group Munich.
  5. William Nordhaus, 2005. "Life After Kyoto: Alternative Approaches to Global Warming," NBER Working Papers 11889, National Bureau of Economic Research, Inc.
  6. Valentina Bosetti & David Tomberlin, 2004. "Fondazione Eni Enrico Mattei," Working Papers 2004.102, Fondazione Eni Enrico Mattei.
  7. Victor,David G. & Heller,Thomas C. (ed.), 2007. "The Political Economy of Power Sector Reform," Cambridge Books, Cambridge University Press, number 9780521865029, Fall.
  8. Valentina Bosetti, Carlo Carraro, Marzio Galeotti, Emanuele Massetti, Massimo Tavoni, 2006. "A World induced Technical Change Hybrid Model," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 13-38.
  9. Ellerman,A. Denny & Buchner,Barbara K. & Carraro,Carlo (ed.), 2007. "Allocation in the European Emissions Trading Scheme," Cambridge Books, Cambridge University Press, number 9780521875684, Fall.
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Cited by:
  1. Thierry Bréchet & Henry Tulkens, 2013. "Climate Policies: A Burden or a Gain?," CESifo Working Paper Series 4147, CESifo Group Munich.
  2. Neil Strachan & Will Usher, 2012. "Failure to achieve stringent carbon reduction targets in a second-best policy world," Climatic Change, Springer, vol. 113(2), pages 121-139, July.
  3. Spencer, Thomas & Marcey, Celine & Colombier, Michel & Guerin, Emmanuel, 2011. "Decarbonizing the EU power sector: policy approaches in the light of current trends and long-term trajectories," MPRA Paper 35009, University Library of Munich, Germany.

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