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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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Web page: http://hal.archives-ouvertes.fr/

Related research

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

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References

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  1. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. 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.
  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. Kolstad, Charles D., 2005. "The simple analytics of greenhouse gas emission intensity reduction targets," Energy Policy, Elsevier, vol. 33(17), pages 2231-2236, November.
  6. Boemare, Catherine & Quirion, Philippe, 2002. "Implementing greenhouse gas trading in Europe: lessons from economic literature and international experiences," Ecological Economics, Elsevier, vol. 43(2-3), pages 213-230, December.
  7. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
  8. Hoel, Michael & Karp, Larry, 2001. "Taxes and quotas for a stock pollutant with multiplicative uncertainty," Journal of Public Economics, Elsevier, vol. 82(1), pages 91-114, October.
  9. Udo Ebert, 1998. "Relative standards: A positive and normative analysis," Journal of Economics, Springer, vol. 67(1), pages 17-38, February.
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Citations

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Cited by:
  1. Marschinski, Robert & Edenhofer, Ottmar, 2010. "Revisiting the case for intensity targets: Better incentives and less uncertainty for developing countries," Energy Policy, Elsevier, vol. 38(9), pages 5048-5058, September.
  2. Burtraw, Dallas & Palmer, Karen & Kahn, Danny, 2010. "A symmetric safety valve," Energy Policy, Elsevier, vol. 38(9), pages 4921-4932, September.
  3. Jack Pezzey & Frank Jotzo, 2010. "Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design," Environmental Economics Research Hub Research Reports 1068, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
  4. Fischer, Carolyn & Springborn, Michael R., 2009. "Emissions Targets and the Real Business Cycle: Intensity Targets versus Caps or Taxes," Discussion Papers dp-09-47, Resources For the Future.
  5. Frank Jotzo & John C. V. Pezzey, 2006. "Optimal Intensity Targets for Greenhouse Emissions Trading Under Uncertainty," Economics and Environment Network Working Papers 0605, Australian National University, Economics and Environment Network.
  6. Vidar Christiansen & Stephen Smith, 2013. "Emissions Taxes and Abatement Regulation under Uncertainty," CESifo Working Paper Series 4121, CESifo Group Munich.
  7. Joseph E. Aldy & William A. Pizer, 2009. "Issues in Designing U.S. Climate Change Policy," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 179-210.
  8. Newell, Richard G. & Pizer, William A., 2006. "Indexed Regulation," Discussion Papers dp-06-32, Resources For the Future.
  9. Webster, Mort & Sue Wing, Ian & Jakobovits, Lisa, 2010. "Second-best instruments for near-term climate policy: Intensity targets vs. the safety valve," Journal of Environmental Economics and Management, Elsevier, vol. 59(3), pages 250-259, May.
  10. Oskar Lecuyer & Philippe Quirion, 2012. "Can Uncertainty Justify Overlapping Policy Instruments to Mitigate Emissions?," Post-Print hal-00801927, HAL.
  11. Quirion, Philippe, 2010. "Complying with the Kyoto Protocol under uncertainty: Taxes or tradable permits?," Energy Policy, Elsevier, vol. 38(9), pages 5166-5173, September.
  12. 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.

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