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Optimal Choice of Policy Instrument and Stringency Under Uncertainty: The Case of Climate Change

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  • Pizer, William

    ()
    (Resources for the Future)

Abstract

The relevance of uncertainty in the climate change policy debate is without doubt. Surprisingly, there have been few attempts to examine the direct policy consequences of including uncertainty in an integrated climate-economy framework. This paper presents results concerning optimal policy stringency and instrument choice when economic and climate parameters assume distributions rather than single values. Uncertainty is found to raise the optimal level of emission reductions relative to an optimization based on one set of central parameter estimates. Much of this effect can be related to economic rather than climate uncertainty. Uncertainty also leads to a preference for taxes over quantity controls. Previous studies of uncertainty in the climate change context have used a small number of states to measure the value of earlier information, learning and adaptation. This paper attempts to refocus attention on the more basic question of whether, in the absence of new information and learning, the inclusion of uncertainty yields significantly different policy conclusions. For policymakers confronting the problem of climate change today, this is the more relevant question.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-97-17.

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Date of creation: 01 Jan 1997
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Handle: RePEc:rff:dpaper:dp-97-17

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Cited by:
  1. Goulder, Lawrence H. & Pizer, William A., 2006. "The Economics of Climate Change," Discussion Papers dp-06-06, Resources For the Future.
  2. Robert S. Pindyck, 2006. "Uncertainty in Environmental Economics," Working Papers 0617, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  3. Habermacher, Florian, 2011. "The Law of Small Abatements: Prices over Quantities in Realistic Climate Policies," Economics Working Paper Series 1118, University of St. Gallen, School of Economics and Political Science, revised Jun 2011.
  4. repec:reg:wpaper:442 is not listed on IDEAS
  5. Robalino, David A. & Jenkins, Carol & El Maroufi, Karim, 2002. "Risks and macroeconomic impacts of HIV/AIDS in the Middle East and North Africa : why waiting to intervene can be costly," Policy Research Working Paper Series 2874, The World Bank.
  6. Michael Toman, 1998. "Research Frontiers in the Economics of Climate Change," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 11(3), pages 603-621, April.
  7. Toman, Michael & Morgenstern, Richard & Anderson, John, 1998. "The Economics of "When" Flexibility in the Design of Greenhouse Gas Abatement Policies," Discussion Papers dp-99-38-rev, Resources For the Future.
  8. Pizer, William, 1997. "Prices vs. Quantities Revisited: The Case of Climate Change," Discussion Papers dp-98-02, Resources For the Future.
  9. Robalino, David A. & Voetberg, Albertus & Picazo, Oscar, 2002. "The macroeconomic impacts of AIDS in Kenya estimating optimal reduction targets for the HIV/AIDS incidence rate," Journal of Policy Modeling, Elsevier, vol. 24(2), pages 195-218, May.
  10. Geoffrey Heal & Bengt Kriström, 2002. "Uncertainty and Climate Change," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 22(1), pages 3-39, June.

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