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Optimal Intensity Targets for Greenhouse Gas Emissions Trading Under Uncertainty

Author

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  • Frank Jotzo

    () (Australian National University, Research School of Pacific and Asian Studies)

  • John C. V. Pezzey

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

Abstract

Uncertainty is an obstacle for commitments under cap and trade schemes for emission permits. We assess how well intensity targets, where each country's permit allocation is indexed to its future realised GDP, can cope with uncertainties in international greenhouse emissions trading. 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 cooperative, global cap-and-trade treaty in 2020 under multiple uncertainties and endogenous commitments, we show that optimal intensity targets could reduce the cost of uncertainty and achieve significant increases in global abatement. The optimal degree of indexation to GDP would vary greatly between countries, including superindexation in some advanced countries, and partial indexation for most developing countries. Standard intensity targets (with one-to-one indexation) would also improve the overall outcome, but to a lesser degree and not in all individual cases. Although target indexation is no magic wand for a future global climate treaty, gains from reduced cost uncertainty and the potential for more stringent environmental commitments could justify the increased complexity and other potential downsides of intensity targets.

Suggested Citation

  • Frank Jotzo & John C. V. Pezzey, 2007. "Optimal Intensity Targets for Greenhouse Gas Emissions Trading Under Uncertainty," Economics and Environment Network Working Papers 0701, Australian National University, Economics and Environment Network.
  • Handle: RePEc:anu:eenwps:0701
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    References listed on IDEAS

    as
    1. Rehdanz, Katrin & Tol, Richard S.J., 2005. "Unilateral regulation of bilateral trade in greenhouse gas emission permits," Ecological Economics, Elsevier, vol. 54(4), pages 397-416, September.
    2. John C. V. Pezzey & Frank Jotzo, 2006. "Mechanisms for Abating Global Emissions Under Uncertainty," Economics and Environment Network Working Papers 0604, Australian National University, Economics and Environment Network.
    3. 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.
    4. Dinda, Soumyananda, 2004. "Environmental Kuznets Curve Hypothesis: A Survey," Ecological Economics, Elsevier, vol. 49(4), pages 431-455, August.
    5. D. Dudek & A. Golub, 2003. ""Intensity" targets: pathway or roadblock to preventing climate change while enhancing economic growth?," Climate Policy, Taylor & Francis Journals, vol. 3(sup2), pages 21-28, December.
    6. Adam Rose & Brandt Stevens & Jae Edmonds & Marshall Wise, 1998. "International Equity and Differentiation in Global Warming Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 12(1), pages 25-51, July.
    7. Frank Jotzo, 2006. "Quantifying uncertainties for emission targets," Economics and Environment Network Working Papers 0603, Australian National University, Economics and Environment Network.
    8. Galeotti, Marzio & Lanza, Alessandro & Pauli, Francesco, 2006. "Reassessing the environmental Kuznets curve for CO2 emissions: A robustness exercise," Ecological Economics, Elsevier, vol. 57(1), pages 152-163, April.
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    More about this item

    Keywords

    Climate policy; emissions trading; uncertainty; intensity targets; optimality; simulation modelling.;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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