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Controlling total emissions under uncertainty

Listed author(s):
  • John C. V. Pezzey


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

  • Frank Jotzo


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

We compare a tax with thresholds (‘prices’), and tradable permits (‘quantities’), as mechanisms to control total ‘emissions’ (or other inputs or outputs) from heterogeneous parties with uncertainties in emissions, costs and benefits. The advantage of prices over quantities is much smaller than in Weitzman’s (1974) non-tradable model. Steeper marginal benefits no longer necessarily prefer quantities; and under tradable permits, marginal cost uncertainty is an inherent benefit. For global greenhouse gas abatement by 18 regions in 2020, a tax dominates, but by much less than suggested by single-party models, especially when targets are indexed to activity levels. Provided handouts of thresholds and permits are limited, including tax interactions moderately raises the advantages of a tax, and of indexation.

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Paper provided by Australian National University, Economics and Environment Network in its series Economics and Environment Network Working Papers with number 0702.

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Length: 52 pages
Date of creation: Apr 2007
Handle: RePEc:anu:eenwps:0702
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