Technological Uncertainty and Cost-effectiveness of CO2 Emission Trading Schemes

Vincent M. Otto and Andreas Löschel

No 08-050, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: This paper studies implications of uncertainty about the arrival date of a competitive CO2 backstop technology for the design of cost-effective CO2 emission trading schemes. For this purpose, we develop a dynamic general equilibrium model that captures empirical links between CO2 emissions associated with energy use, the rate and direction of technical change and the economy. We specify CO2 capture and storage (CCS) as the backstop technology whose competitiveness is anticipated or not. We find that the discounted welfare loss associated with the environmental target is lower if CCS is not anticipated and that CO2 shadow prices are then relatively high in the years before CCS is competitive. By not simply postponing the implementation of an emission reduction strategy until CCS is competitive, one relies more on economy-wide technical change and its welfare-enhancing technology externalities, thus allowing for a higher steady state.

Keywords: CO2 capture and storage; computable general equilibrium modeling; directed technical change; emission trading; technological uncertainty (search for similar items in EconPapers)
JEL-codes: D58 D83 H23 O33 Q43 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-ene and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:7360

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