Controlling total emissions under uncertainty
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.
|Date of creation:||Apr 2007|
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