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Does uncertainty justify intensity emission caps?

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  • Philippe Quirion

    ()
    (CIRED - Centre International de Recherche sur l'Environnement et le Développement - CIRAD : UMR56 - CNRS : UMR8568 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Nationale du Génie Rural des Eaux et Forêts)

Abstract

Environmental policies often set ‘‘relative'' or ‘‘intensity'' emission caps, i.e. emission limits proportional to the polluting firm's output. One of the arguments put forth in favour of relative caps is based on the uncertainty on business-as-usual output: if the firm's production level is higher than expected, so will be business-as-usual emissions, hence reaching a given level of emissions will be more costly than expected.As a consequence, it is argued, a higher emission level should be allowed if the production level is moreimportant than expected. We assess this argument with a stochastic analytical model featuring two randomvariables: the business-as-usual emission level, proportional to output, and the slope of the marginalabatement cost curve.We compare the relative cap to an absolute cap and to a price instrument, in terms ofwelfare impact. It turns out that in most plausible cases, either a price instrument or an absolute cap yields ahigher expected welfare than a relative cap. Quantitatively, the difference in expected welfare is typically very small between the absolute and the relative cap but may be significant between the relative cap and the price instrument.

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File URL: http://halshs.archives-ouvertes.fr/docs/00/05/19/03/PDF/intensity_targets_REE_final.pdf
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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00007162.

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Date of creation: 2005
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Publication status: Published, Resource and Energy Economics, 2005, 27, 4, 343-353
Handle: RePEc:hal:journl:halshs-00007162

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00007162/en/
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Related research

Keywords: Uncertainty; Policy choice; Environmental taxes; Tradable permits; Intensity target;

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  1. Catherine Boemare & Philippe Quirion, 2002. "Implementing greenhouse gas trading in Europe: lessons from economic literature and international experiences," Post-Print halshs-00007264, HAL.
  2. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
  4. Fischer, Carolyn, 2001. "Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards," Discussion Papers dp-01-22, Resources For the Future.
  5. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
  6. Kolstad, Charles D., 2005. "The simple analytics of greenhouse gas emission intensity reduction targets," Energy Policy, Elsevier, vol. 33(17), pages 2231-2236, November.
  7. Udo Ebert, 1998. "Relative standards: A positive and normative analysis," Journal of Economics, Springer, vol. 67(1), pages 17-38, February.
  8. Hoel, Michael & Karp, Larry, 2000. "Taxes and Quotas for a Stock Pollutant with Multiplicative Uncertainty," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9v86p5s7, Department of Agricultural & Resource Economics, UC Berkeley.
  9. Pizer, William A., 1999. "The optimal choice of climate change policy in the presence of uncertainty," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 255-287, August.
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