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Optimal Intensity Targets for Greenhouse Gas 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)

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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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Publisher Info
Paper provided by Australian National University, Economics and Environment Network in its series Economics and Environment Network Working Papers with number 0701.

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Length: 32 pages
Date of creation: Jan 2007
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Handle: RePEc:anu:eenwps:0701

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

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

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Find related papers by JEL classification:
Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

References listed on IDEAS
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  1. Dinda, Soumyananda, 2004. "Environmental Kuznets Curve Hypothesis: A Survey," Ecological Economics, Elsevier, vol. 49(4), pages 431-455, August. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Blackwell Publishing, vol. 41(4), pages 477-91, October. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
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Cited by:
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  1. 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. [Downloadable!] (restricted)
  2. Richard G. Newell & William A. Pizer, 2008. "Indexed Regulation," NBER Working Papers 13991, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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