Absolute versus intensity-based emission caps

A. Denny Ellerman and Ian Sue Wing

Climate Policy, 2003, vol. 3, issue sup2, S7-S20

Abstract: Cap-and-trade systems limit emissions to some pre-specified absolute quantity. Intensity-based limits, that restrict emissions to some pre-specified rate relative to input or output, are much more widely used in environmental regulation and have gained attention recently within the context of greenhouse gas (GHG) emissions trading. In this paper we provide a non-technical introduction to the differences between these two forms of emission limits. Our aim is not to advocate either form, but to elucidate the properties of each in a world where future emissions and GDP are not known with certainty. We argue that the two forms have identical effects in a world where future emissions and economic output (i.e. GDP) are known with certainty, and show that outcomes for marginal costs, abatement, emissions and welfare diverge only because of the variance of actual future GDP relative to its forecast expectation.© 2003 Elsevier Ltd. All rights reserved.

Date: 2003
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DOI: 10.1016/j.clipol.2003.09.013

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