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Expectations of linear functions with respect to truncazted multinormal distributions, with applications for uncertainty analysis in environmental modelling

Author

Listed:
  • Jason J. Sharples

    (Australian National University, Centre for Resource and Environmental Studies)

  • John C. V. Pezzey

    (Australian National University,Centre for Resource and Environmental Studies)

Abstract

Uncertainty can hamper the stringency of commitments under cap and trade schemes. We assess how well intensity targets, where countries' permit allocations are indexed to future realised GDP, can cope with uncertainties in a post-Kyoto international greenhouse emissions trading scheme. We present some empirical foundations for intensity targets and derive a simple rule for the optimal degree of indexation to GDP. Using an 18-region simulation model of a 2020 global cap-and-trade treaty under multiple uncertainties and endogenous commitments, we estimate that optimal intensity targets could achieve global abatement as much as 20 per cent higher than under absolute targets, and even greater increases in welfare measures. The optimal degree of indexation to GDP would vary greatly between countries, including super-indexation in some advanced countries, and partial indexation for most developing countries. Standard intensity targets (with one-toone indexation) would also improve the overall outcome, but to a lesser degree and not in all cases. Although target indexation is no magic wand for a future global climate treaty, gains from reduced cost uncertainty might justify increased complexity, framing issues and other potential downsides of intensity targets.

Suggested Citation

  • Jason J. Sharples & John C. V. Pezzey, 2005. "Expectations of linear functions with respect to truncazted multinormal distributions, with applications for uncertainty analysis in environmental modelling," Economics and Environment Network Working Papers 0503, Australian National University, Economics and Environment Network.
  • Handle: RePEc:anu:eenwps:0503
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    File URL: http://een.anu.edu.au/download_files/een0503.pdf
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    References listed on IDEAS

    as
    1. Horrace, William C., 2005. "On ranking and selection from independent truncated normal distributions," Journal of Econometrics, Elsevier, vol. 126(2), pages 335-354, June.
    2. David Abler & Adrián Rodríguez & James Shortle, 1999. "Parameter Uncertainty in CGE Modeling of the Environmental Impacts of Economic Policies," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 14(1), pages 75-94, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    linear functions; truncazted multinormal distributions; uncertainty analysis; environmental modelling;
    All these keywords.

    JEL classification:

    • Q00 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - General

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