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Who gains from technological advancement? The role of policy design when cost development for key abatement technologies is uncertain

Matthias Weitzel ()

Environmental Economics and Policy Studies, 2017, vol. 19, issue 1, No 8, 181 pages

Abstract: 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 country experiencing a cost reduction can actually be worse off. This holds true for a variety of quantity and price-based emission policies. Under price-based policies, a country with lower abatement costs might engage 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 by 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 benefits energy importers because the value of fossil fuels is reduced. The opposite holds for a shock to CCS which benefits energy exporters. The channels identified in the theoretical model can be confirmed in a more complex global computable general equilibrium model. Some regions are indeed worse off from a shock that lowers their abatement costs.

Keywords: Abatement cost; Carbon capture and storage; Climate policy; Renewable energy; Technological uncertainty (search for similar items in EconPapers)
JEL-codes: C68 Q54 Q58 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s10018-016-0142-9

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