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Worse off from reduced cost? The role of policy design under uncertain technological advancement

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  • Matthias Weitzel

Abstract

A simple model is used to illustrate the effects of a reduction in (marginal) abatement cost in a two country setting. It can be shown that a the country experiencing a cost reduction can actually be worse off. This holds true for a variety of quantity and price based emission policies. The most important channel is that a country with lower abatement costs engages in additional abatement effort for which it is not compensated. Under a quantity based policy with a given allocation, a seller of permits can also be negatively affected from a lower carbon price. We also argue that abatement cost shocks to renewable energy and carbon capture and storage (CCS) are different in terms of their effects on international energy markets. A shock to renewable energy reduces fossil fuel rents benefiting energy importers, while the opposite holds for a shock to CCS. The channels obtained in the theoretical model can be confirmed in a more complex global computable general equilibrium model. Some regions are indeed worse off from shock that lowers their abatement costs

Suggested Citation

  • Matthias Weitzel, 2014. "Worse off from reduced cost? The role of policy design under uncertain technological advancement," Kiel Working Papers 1926, Kiel Institute for the World Economy.
  • Handle: RePEc:kie:kieliw:1926
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    Keywords

    Climate policy; prices vs. quantities; renewable energy; CCS; technological uncertainty; CGE model;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • 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

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