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Early Emissions Reduction Programs: An Application to CO2 Policy

  • Parry, Ian


    (Resources for the Future)

  • Toman, Michael

In the wake of the December 1997 Kyoto Protocol, which, if implemented, would oblige the United States and other industrialized countries to reduce greenhouse gases (GHGs) by 2008–2012, a number of proposals have been offered to increase the incentives for reducing emissions over the nearer term. The existence of an interim period between setting and implementing environmental goals is ubiquitous in environmental policymaking. The existence of this interim period gives rise to several potential rationales for early emissions reductions. In this paper we use a series of simple models and numerical illustrations to analyze some aspects of the performance of early emissions reduction programs in the case of GHGs. We show that there is a compelling economic case for allowing early GHGs reduction credits if countries (not just individual firms) could bank early credits to offset future emissions. The annualized cost savings to the United States from spreading out abatement over time could easily amount to several billion dollars. But without the aggregate banking provision, such credits could easily generate an excessive amount of abatement and produce net economic losses. We analyze a number of other issues that affect the economic efficiency of early reduction credits, including asymmetric information, learning-by-doing (LBD), and fiscal impacts. We also compare the performance of an early reduction credits program with that of an early cap-and-trade program. This latter approach, if properly scaled, can avoid many of the problems associated with early reduction credits.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-00-26.

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Date of creation: 01 Jun 2000
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Handle: RePEc:rff:dpaper:dp-00-26
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  1. Roughgarden, Tim & Schneider, Stephen H., 1999. "Climate change policy: quantifying uncertainties for damages and optimal carbon taxes," Energy Policy, Elsevier, vol. 27(7), pages 415-429, July.
  2. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249.
  3. J. E. Stiglitz, 1999. "Introduction," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(3), pages 249-254, November.
  4. Stavins, Robert, 2000. "Experience with Market-Based Environmental Policy Instruments," Working Paper Series rwp00-004, Harvard University, John F. Kennedy School of Government.
  5. Ian Parry, 2002. "Tax Deductions and the Marginal Welfare Cost of Taxation," International Tax and Public Finance, Springer, vol. 9(5), pages 531-552, September.
  6. Fischer, Carolyn & Parry, Ian W. H. & Pizer, William A., 2003. "Instrument choice for environmental protection when technological innovation is endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 523-545, May.
  7. Fischer, Carolyn & Toman, Michael & Kerr, Suzi, 1998. "Using Emissions Trading to Regulate U.S. Greenhouse Gas Emissions: An Overview of Policy Design and Implementation Issues," Discussion Papers dp-98-40, Resources For the Future.
  8. Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Discussion Papers dp-97-18-rev, Resources For the Future.
  9. Pizer, William A., 1999. "The optimal choice of climate change policy in the presence of uncertainty," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 255-287, August.
  10. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
  11. Samuel Fankhauser, 1994. "The Social Costs of Greenhouse Gas Emissions: An Expected Value Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 157-184.
  12. Burtraw, Dallas & Krupnick, Alan & Palmer, Karen & Paul, Anthony & Toman, Michael & Bloyd, Cary, 2003. "Ancillary benefits of reduced air pollution in the US from moderate greenhouse gas mitigation policies in the electricity sector," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 650-673, May.
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