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Optimal intensity targets for emissions trading under uncertainty (now replaced by EEN0605)

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Author Info

  • Frank Jotzo

    () (Australian National University, Research School of Pacific and Asian Studies)

  • John C. V. Pezzey

    () (Australian National University,Centre for Resource and Environmental Studies)

Abstract

Uncertainty can hamper the stringency of commitments under cap and trade schemes. We assess how well intensity targets, where countries' permit allocations are indexed to future realised GDP, can cope with uncertainties in a post-Kyoto international greenhouse emissions trading scheme. 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 2020 global cap-and-trade treaty under multiple uncertainties and endogenous commitments, we estimate that optimal intensity targets could achieve global abatement as much as 20 per cent higher than under absolute targets, and even greater increases in welfare measures. The optimal degree of indexation to GDP would vary greatly between countries, including super-indexation in some advanced countries, and partial indexation for most developing countries. Standard intensity targets (with one-toone indexation) would also improve the overall outcome, but to a lesser degree and not in all cases. Although target indexation is no magic wand for a future global climate treaty, gains from reduced cost uncertainty might justify increased complexity, framing issues and other potential downsides of intensity targets.

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File URL: http://een.anu.edu.au/download_files/een0504.pdf
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Bibliographic Info

Paper provided by Australian National University, Economics and Environment Network in its series Economics and Environment Network Working Papers with number 0504.

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Length: 43 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:anu:eenwps:0504

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Web page: http://een.anu.edu.au/

Related research

Keywords: Climate policy; emissions trading; flexible targets; intensity targets; optimality; simulation modelling; uncertainty.;

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References

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