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Complying with the Kyoto Protocol under uncertainty: Taxes or tradable permits?

  • Quirion, Philippe

The Kyoto Protocol allocates tradable emission allowances (AAUs) to developed countries, but they are free to choose a set of policy instruments to comply with these targets. We compare two different policy instruments: a tax and purely domestic tradable permits, for the European Union, the US and Japan. Information on abatement costs and international permit price is imperfect and stems from nine global economic models. For a country party to the Protocol, the benefit of emission reduction is that it can sell more or has to buy less AAUs. We show that in this context, permits entail a slightly lower expected cost than a tax for the US and Japan, whereas both instruments yield an almost equal outcome for Europe. Applying Weitzman's framework (Prices vs. quantities, RES, 1974) in this context, we show the importance of the positive correlation between costs and benefits: technology shocks that lead to low abatement costs in one country generally lead to low abatement costs in other countries too, thereby leading to a low international permit price in the true-up period.

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Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 38 (2010)
Issue (Month): 9 (September)
Pages: 5166-5173

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Handle: RePEc:eee:enepol:v:38:y:2010:i:9:p:5166-5173
Contact details of provider: Web page: http://www.elsevier.com/locate/enpol

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  1. Ireland, N J, 1977. "Ideal Prices vs. Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 183-86, February.
  2. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
  3. Brian R. Copeland & M. Scott Taylor, 2000. "Free Trade and Global Warming: A Trade Theory View of the Kyoto Protocol," NBER Working Papers 7657, National Bureau of Economic Research, Inc.
  4. Philippe Quirion, 2005. "Does uncertainty justify intensity emission caps?," Post-Print halshs-00007162, HAL.
  5. Jean-Charles Hourcade & Frédéric Ghersi, 2002. "The Economics of a Lost Deal : Kyoto - The Hague - Marrakesh," Post-Print halshs-00009838, HAL.
  6. 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.
  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. Shrestha, Ratna K., 2001. "The choice of environmental policy instruments under correlated uncertainty," Resource and Energy Economics, Elsevier, vol. 23(2), pages 175-185, April.
  9. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. J. E. Stiglitz, 1999. "Introduction," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(3), pages 249-254, November.
  11. Ghersi, Frederic & Hourcade, Jean-Charles, 2001. "The Economics of a Lost Deal," Discussion Papers dp-01-48-, Resources For the Future.
  12. Yohe, Gary Wynn, 1977. "Comparisons of price and quantity controls: A survey," Journal of Comparative Economics, Elsevier, vol. 1(3), pages 213-233, September.
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