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The Law of Small Abatements: Prices over Quantities in Realistic Climate Policies

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  • Habermacher, Florian

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Abstract

A fundamental question of high practical relevance for climate policy design is whether price controls such as CO2 taxes, or quantity restrictions such as emission quotas should be preferred. I show that as the reach of climate policies is limited in terms of either suboptimally low reduction targets or the policy's extent over only parts of the world, the likelihood of price measures to be more advantageous in terms of minimizing uncertainty related welfare losses increases. The increase of the relative advantage of the price mechanisms over quantity measures may be more than proportional to the regional limitedness of the policy, suggesting that even for relatively important climate coalitions the identified factor implies a clear advantage for price measures. This analysis of the prices vs. quantities question is closer to so far on a high political level seriously discussed climate policies, not to speak of already implemented local or regional climate policies, than previous theoretical literature addressing the issue, which typically relied on the assumption of first bests (i.e. global) policies. Illustrating the main thought of the analysis, I explain why in the example of policies with an extent corresponding to the current Kyoto mechanism, the simple theoretical weighting of the price vs. the quantity approach seems to favor price mechanisms independently of the exact form of the global abatement cost and benefit curves.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/econwp/EWP-1118.pdf
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Bibliographic Info

Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1118.

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Length: 22 pages
Date of creation: May 2011
Date of revision: Jun 2011
Handle: RePEc:usg:econwp:2011:18

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Keywords: prices versus quantities; greenhouse gas tax; emission quotas; tradable permits; uncertainty; emission abatement costs; climate change costs; emission abatement benefits; regional climate policy; unilateral climate policy.;

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  1. Hoel, Michael & Karp, Larry, 2002. "Taxes versus quotas for a stock pollutant," Resource and Energy Economics, Elsevier, vol. 24(4), pages 367-384, November.
  2. Pizer, William, 1997. "Optimal Choice of Policy Instrument and Stringency Under Uncertainty: The Case of Climate Change," Discussion Papers dp-97-17, Resources For the Future.
  3. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  4. William Nordhaus, 2005. "Life After Kyoto: Alternative Approaches to Global Warming," NBER Working Papers 11889, National Bureau of Economic Research, Inc.
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