Mechanisms for Abating Global Emissions Under Uncertainty
John Pezzey () and
Frank Jotzo ()
Economics and Environment Network Working Papers from Australian National University, Economics and Environment Network
We give theoretical, partial equilibrium comparisons of a tax with thresholds, tradable targets ('emissions trading' or ET), and non-tradable targets, as mechanisms to abate well-mixed ('global') emissions from many parties, under independent uncertainties in both future business-as-usual emissions and marginal abatement costs. All three mechanisms are revenue-neutral, and use flexible thresholds or targets indexed continuously to parties' activity levels. We analyse both risk-neutral or risk-averse behaviour. Key theoretical results are that because of emissions uncertainty, there is no simple Weitzman (1974) rule for choosing between 'prices' (a tax) to 'quantities' (ET); under ET, marginal abatement cost uncertainty is a benefit, compared to certainty; and under risk aversion, any mechanism with more expected welfare also gives more expected abatement. We apply our theory to global greenhouse gas abatement in 2020, using an 18-region numerical simulation model with new uncertainty estimates. Key global, empirical results are that under either risk behaviour, a tax dominates ET, which hugely dominates non-tradable targets; and under risk aversion, an optimally indexed tax gives about 60% more welfare and 30% more abatement than unindexed ET, while optimally indexed ET achieves about two-fifths of these improvements.
Keywords: emissions trading; global abatement; greenhouse gases; risk aversion; tax; uncertainty (search for similar items in EconPapers)
JEL-codes: D81 H23 Q54 Q58 (search for similar items in EconPapers)
Pages: 59 pages
New Economics Papers: this item is included in nep-ene, nep-env, nep-pbe, nep-res and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:anu:eenwps:0604
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