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Optimal Intensity Targets for Greenhouse Emissions Trading Under Uncertainty

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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 is an obstacle for 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 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 super-indexation 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 might justify the increased complexity and other potential downsides of intensity targets.

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File URL: http://een.anu.edu.au/download_files/een0605.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 0605.

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Length: 30 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:anu:eenwps:0605

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

Related research

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

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References

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  1. Holtz-Eakin, Douglas & Selden, Thomas M., 1995. "Stoking the fires? CO2 emissions and economic growth," Journal of Public Economics, Elsevier, vol. 57(1), pages 85-101, May.
  2. 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.
  3. Quirion, Philippe, 2005. "Does uncertainty justify intensity emission caps?," Resource and Energy Economics, Elsevier, vol. 27(4), pages 343-353, November.
  4. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
  5. Philippe Quirion, 2004. "Prices versus Quantities in a Second-Best Setting," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 29(3), pages 337-360, November.
  6. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
  7. 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.
  8. Nordhaus, William D, 1991. "To Slow or Not to Slow: The Economics of the Greenhouse Effect," Economic Journal, Royal Economic Society, vol. 101(407), pages 920-37, July.
  9. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  10. Frank Jotzo, 2006. "Quantifying uncertainties for emission targets," Economics and Environment Network Working Papers 0603, Australian National University, Economics and Environment Network.
  11. Kolstad, Charles D., 2005. "The simple analytics of greenhouse gas emission intensity reduction targets," Energy Policy, Elsevier, vol. 33(17), pages 2231-2236, November.
  12. Toman, Michael, 2003. "Economic Analysis and the Formulation of U.S. Climate Policy," Discussion Papers dp-02-59, Resources For the Future.
  13. Peter Bohm & Björn Carlén, 2002. "A Cost-effective Approach to Attracting Low-income Countries to International Emissions Trading: Theory and Experiments," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 23(2), pages 187-211, October.
  14. Barros, Vincente & Grand, Mariana Conte, 2002. "Implications of a dynamic target of greenhouse gases emission reduction: the case of Argentina," Environment and Development Economics, Cambridge University Press, vol. 7(03), pages 547-569, July.
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Cited by:
  1. Fischer, Carolyn & Springborn, Michael, 2011. "Emissions targets and the real business cycle: Intensity targets versus caps or taxes," Journal of Environmental Economics and Management, Elsevier, vol. 62(3), pages 352-366.
  2. Newell, Richard G. & Pizer, William A., 2006. "Indexed Regulation," Discussion Papers dp-06-32, Resources For the Future.
  3. Frank Jotzo, 2010. "Comparing the Copenhagen emissions targets," Environmental Economics Research Hub Research Reports 1078, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
  4. Frank Jotzo & John C. V. Pezzey, 2006. "A better Kyoto: options for flexible commitments," Economics and Environment Network Working Papers 0610, Australian National University, Economics and Environment Network.
  5. Pezzey, John C.V., 2006. "Neither the rock nor the hard place: using payment thresholds to balance the politics and the economics of emissions control," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 139892, Australian Agricultural and Resource Economics Society.

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