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Price versus Quantities versus Indexed Quantities

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  • Branger, Frédéric
  • Quirion, Philippe

Abstract

We develop a stochastic model to rank different policies (tax, fixed cap and relative cap) according to their expected total social costs. Three types of uncertainties are taken into account: uncertainty about abatement costs, business-as-usual (BAU) emissions and future economic output (the two latter being correlated). Two parameters: the ratio of slopes of marginal benefits and marginal costs, and the above-mentioned correlation, are crucial to determine which instrument is preferred. When marginal benefits are relatively flatter than marginal costs, prices are preferred over fixed caps (Weitzman’s result). When the former correlation is higher than a parameter- dependent threshold, relative caps are preferred to fixed caps. An intermediate condition is found to compare the tax instrument and the relative cap. The model is then empirically tested for seven different regions (China, the United States, Europe, India, Russia, Brazil and Japan). We find that tax is preferred to caps (absolute or relative) in all cases, and that relative caps are preferred to fixed caps in the US and emerging countries (except Brazil where it is ambiguous), whereas fixed cap are preferred to relative cap in Europe and Japan.

Suggested Citation

  • Branger, Frédéric & Quirion, Philippe, "undated". "Price versus Quantities versus Indexed Quantities," Climate Change and Sustainable Development 187277, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemcl:187277
    DOI: 10.22004/ag.econ.187277
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    Cited by:

    1. Wang, Banban & Pizer, William A. & Munnings, Clayton, 2022. "Price limits in a tradable performance standard," Journal of Environmental Economics and Management, Elsevier, vol. 116(C).
    2. Foramitti, Joël & Savin, Ivan & van den Bergh, Jeroen C.J.M., 2021. "Emission tax vs. permit trading under bounded rationality and dynamic markets," Energy Policy, Elsevier, vol. 148(PB).
    3. Meunier, Guy & Montero, Juan-Pablo & Ponssard, Jean-Pierre, 2018. "Output-based allocations in pollution markets with uncertainty and self-selection," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 832-851.
    4. Jinhua Zhao, 2022. "Aggregate emission intensity targets: Applications to the Paris Agreement," Economic Inquiry, Western Economic Association International, vol. 60(4), pages 1875-1897, October.
    5. Jeitschko, Thomas D. & Kim, Soo Jin & Pal, Pallavi, 2024. "Curbing price fluctuations in cap-and-trade auctions under changing demand expectations," Energy Economics, Elsevier, vol. 139(C).
    6. Thomas D. Jeitschko & Pallavi Pal, 2021. "Curbing Price Fluctuations in Cap-and-Trade Auctions," CESifo Working Paper Series 9266, CESifo.
    7. Xin Liu & Yuan Li & Dayong Zhang & Lei Zhu, 2018. "On the Effectiveness of the Abatement Policy Mix: A Case Study of China’s Energy-Intensive Sectors," Energies, MDPI, vol. 11(3), pages 1-31, March.
    8. Sascha Kollenberg & Luca Taschini, 2015. "The European Union Emissions Trading System and the Market Stability Reserve: Optimal Dynamic Supply Adjustment," CESifo Working Paper Series 5380, CESifo.

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    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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