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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

Abstract: 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
Date: 2006-08
New Economics Papers: this item is included in nep-ene, nep-env, nep-pbe, nep-res and nep-upt
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