The hedge value of international emissions trading under uncertainty
This paper estimates the value of international emissions trading, focusing on a here-to-fore neglected component; its value as a hedge against uncertainty. Much analysis has been done of the Kyoto Protocol and other potential international greenhouse gas mitigation policies comparing the costs of achieving emission targets with and without trading. These studies often show large cost reductions for all Parties under trading compared to a no trading case. We investigate the welfare gains of including emissions trading in the presence of uncertainty in economic growth rates, using both a partial equilibrium model based on marginal abatement cost curves and a computable general equilibrium model. We find that the hedge value of international trading is small relative to its value in reallocating emissions reductions when the burden sharing scheme does not resemble a least cost allocation. We also find that the effects of pre-existing tax distortions and terms of trade dominate the hedge value of trading. We conclude that the primary value of emissions trading in international agreements is as a burden sharing or wealth transfer mechanism and should be judged accordingly.
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- Mustafa Babiker, John Reilly and Laurent Viguier, 2004. "Is International Emissions Trading Always Beneficial?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 33-56.
- Henry D. Jacoby & Richard S. Eckaus & A. Denny Ellerman & Ronald G. Prinn & David M. Reiner & Zili Yang, 1997. "CO2 Emissions Limits: Economic Adjustments and the Distribution of Burdens," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 31-58.
- Webster, Mort & Cho, Cheol-Hung, 2006. "Analysis of variability and correlation in long-term economic growth rates," Energy Economics, Elsevier, vol. 28(5-6), pages 653-666, November.
- McFarland, J. R. & Reilly, J. M. & Herzog, H. J., 2004. "Representing energy technologies in top-down economic models using bottom-up information," Energy Economics, Elsevier, vol. 26(4), pages 685-707, July.
- J. E. Stiglitz, 1999. "Introduction," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(3), pages 249-254, November.
- Viguier, Laurent L. & Babiker, Mustafa H. & Reilly, John M., 2003. "The costs of the Kyoto Protocol in the European Union," Energy Policy, Elsevier, vol. 31(5), pages 459-481, April.
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