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Technological Scarcity, Compliance Flexibility And The Optimal Time Path Of Emissions Abatement

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  • Bryan K. Mignone

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    Abstract

    The overall economic efficiency of a quantity-based approach to greenhouse gas mitigation depends strongly on the extent to which such a program provides opportunities for compliance flexibility, particularly with regard to the timing of emissions abatement. Here I consider a program in which annual targets are determined by choosing the optimal time path of reductions consistent with an exogenously prescribed cumulative reduction target and fixed technology set. I then show that if the availability of low-carbon technology is initially more constrained than anticipated, the optimal reduction path shifts abatement toward later compliance periods. For this reason, a rigid policy in which fixed annual targets are strictly enforced in every year yields a cumulative environmental outcome identical to the optimal policy but an economic outcome worse than the optimal policy. On the other hand, a policy that aligns actual prices (or equivalently, costs) with expected prices by simply imposing an explicit price ceiling (often referred to as a "safety valve") yields the opposite result. Comparison among these multiple scenarios implies that there are significant gains to realizing the optimal path but that further refinement of the actual regulatory instrument will be necessary to achieve that goal in a real cap-and-trade system.

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    Bibliographic Info

    Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2008-36.

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    Length: 23 pages
    Date of creation: Nov 2008
    Date of revision:
    Handle: RePEc:een:camaaa:2008-36

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    1. Pizer, William & Newell, Richard, 1998. "Regulating Stock Externalities Under Uncertainty," Discussion Papers dp-99-10-rev, Resources For the Future.
    2. Warwick J. McKibbin & Peter J Wilcoxen, 2003. "Estimates of the Costs of Kyoto-Marrakesh Versus The McKibbin-Wilcoxen Blueprint," Departmental Working Papers 2003-14, The Australian National University, Arndt-Corden Department of Economics.
    3. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
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