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Can Uncertainty Justify Overlapping Policy Instruments to Mitigate Emissions ?

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  • Oskar Lecuyer

    ()
    (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - AgroParisTech)

  • Philippe Quirion

    (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - AgroParisTech)

Abstract

This article constitutes a new contribution to the analysis of overlapping instruments to cover the same emission sources. Using both an analytical and a numerical model, we show that when the risk that the CO2 price drops to zero and the political unavailability of a CO2 tax (at least in the European Union) are taken into account, it can be socially optimal to implement an additional instrument encouraging the reduction of emissions, for instance a renewable energy subsidy. Our analysis has both a practical and a theoretical purpose. It aims at giving economic insight to policymakers in a context of increased uncertainty concerning the future stringency of the European Emission Trading Scheme. It also gives another rationale for the use of several instruments to cover the same emission sources, and shows the importance of accounting for corner solutions in the definition of the optimal policy mix. Highlights : - We develop an analytical and a numerical model of the EU energy and carbon markets. - We add uncertainty on energy demand and focus on instruments for emission reduction. - We analyze the economic implications of a risk that the CO2 price drops to zero. - We show that it can be socially optimal to add an instrument to the EU-ETS.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00866440.

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Date of creation: Dec 2012
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Handle: RePEc:hal:wpaper:hal-00866440

Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00866440
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Related research

Keywords: Uncertainty; Policy overlapping; Mitigation policy; Energy policy; EU-ETS; Renewable energy; Corner solutions; Nil CO2 price;

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