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Optimal intensity targets for greenhouse gas emissions trading under uncertainty

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  • Frank Jotzo

    ()

  • John Pezzey

    ()

Abstract

Uncertainty is an obstacle for commitments under cap and trade schemes for emission permits. We assess how well intensity targets, where each country's permit allocation is indexed to its future realised GDP, can cope with uncertainties in international greenhouse emissions trading. We present some empirical foundations for intensity targets and derive a simple rule for the optimal degree of indexation to GDP. Using an 18-region simulation model of a cooperative, global cap-and-trade treaty in 2020 under multiple uncertainties and endogenous commitments, we show that optimal intensity targets could reduce the cost of uncertainty and achieve significant increases in global abatement. The optimal degree of indexation to GDP would vary greatly between countries, including superindexation in some advanced countries, and partial indexation for most developing countries. Standard intensity targets (with one-to-one indexation) would also improve the overall outcome, but to a lesser degree and not in all individual cases. Although target indexation is no magic wand for a future global climate treaty, gains from reduced cost uncertainty and the potential for more stringent environmental commitments could justify the increased complexity and other potential downsides of intensity targets.

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File URL: http://hdl.handle.net/10.1007/s10640-006-9078-z
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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 38 (2007)
Issue (Month): 2 (October)
Pages: 259-284

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Handle: RePEc:kap:enreec:v:38:y:2007:i:2:p:259-284

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Web page: http://www.springerlink.com/link.asp?id=100263

Related research

Keywords: Climate policy; Emissions trading; Uncertainty; Intensity targets; Optimality; Simulation modelling; Q540; Q580; D800;

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References

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  1. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Galeotti, Marzio & Lanza, Alessandro & Pauli, Francesco, 2006. "Reassessing the environmental Kuznets curve for CO2 emissions: A robustness exercise," Ecological Economics, Elsevier, vol. 57(1), pages 152-163, April.
  3. John C. V. Pezzey & Frank Jotzo, 2006. "Mechanisms for Abating Global Emissions Under Uncertainty," Economics and Environment Network Working Papers 0604, Australian National University, Economics and Environment Network.
  4. Frank Jotzo, 2006. "Quantifying uncertainties for emission targets," Economics and Environment Network Working Papers 0603, Australian National University, Economics and Environment Network.
  5. Dinda, Soumyananda, 2004. "Environmental Kuznets Curve Hypothesis: A Survey," Ecological Economics, Elsevier, vol. 49(4), pages 431-455, August.
  6. Rehdanz, Katrin & Tol, Richard S.J., 2005. "Unilateral regulation of bilateral trade in greenhouse gas emission permits," Ecological Economics, Elsevier, vol. 54(4), pages 397-416, September.
  7. Webster, Mort & Cho, Cheol-Hung, 2006. "Analysis of variability and correlation in long-term economic growth rates," Energy Economics, Elsevier, vol. 28(5-6), pages 653-666, November.
  8. Adam Rose & Brandt Stevens & Jae Edmonds & Marshall Wise, 1998. "International Equity and Differentiation in Global Warming Policy," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 12(1), pages 25-51, July.
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Citations

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Cited by:
  1. David I. Stern & Frank Jotzo, 2009. "How Ambitious are China and India's Emissions Intensity Targets?," Environmental Economics Research Hub Research Reports 1051, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
  2. Barbara Annicchiarico & Fabio di Dio, 2013. "Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model," CEIS Research Paper 286, Tor Vergata University, CEIS, revised 30 Sep 2013.
  3. Jan-Tjeerd Boom & Bouwe Dijkstra, 2009. "Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading Under Perfect and Imperfect Competition," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 44(1), pages 107-136, September.
  4. Fischer, Carolyn & Springborn, Michael R., 2011. "Emissions Targets and the Real Business Cycle: Intensity Targets versus Caps or Taxes," Discussion Papers dp-09-47-rev, Resources For the Future.
  5. Frank Jotzo, 2013. "Emissions trading in China: Principles, design options and lessons from international practice," CCEP Working Papers 1303, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
  6. Newell, Richard G. & Pizer, William A., 2006. "Indexed Regulation," Discussion Papers dp-06-32, Resources For the Future.
  7. Jack Pezzey & Frank Jotzo, 2010. "Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design," Environmental Economics Research Hub Research Reports 1068, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
  8. Marschinski, Robert & Edenhofer, Ottmar, 2010. "Revisiting the case for intensity targets: Better incentives and less uncertainty for developing countries," Energy Policy, Elsevier, vol. 38(9), pages 5048-5058, September.
  9. Yiyong Cai & Yingying Lu & David Newth & Alison Stegman, 2013. "Modelling Complex Emissions Intensity Targets with a Simple Simulation Algorithm," CAMA Working Papers 2013-33, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  10. Pezzey, John C.V. & Jotzo, Frank, 2012. "Tax-versus-trading and efficient revenue recycling as issues for greenhouse gas abatement," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 230-236.

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