How uncertainty reduces greenhouse gas emissions
China has becoming in 2006 the world’s largest emitter of greenhouse gases (GHG), responsible for one-fifth of world’s emissions from power generation. And further strong growth in this sector is to be expected. To provide these additional power generation capacities substantial investments in China’s energy infrastructure are necessary. But the potential investors are confronted with uncertainty in the design of China’s future climate policy, which might affect the profitability of GHG emitting power plants. It is the aim of this paper to investigate the role of uncertainty in China’s climate policy on investments in the electricity sector and its consequences for GHG emissions. We analyze the topic with a stochastic dynamic computable general equilibrium model with an extended energy sector and calibrated with Chinese data. The results show that uncertainty about the timing and extent of China’s climate policy lowers emissions compared to a world with perfect information. Uncertainty lowers the present value of coal-fired electricity in pre-policy periods and has so a positive effect for the environment.
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