Optimal Intensity Targets for Greenhouse Gas Emissions Trading Under Uncertainty
Frank Jotzo () and
John Pezzey ()
Economics and Environment Network Working Papers from Australian National University, Economics and Environment Network
Uncertainty is an obstacle for commitments under cap and trade schemes for emission permits. We assess how well intensity targets, where each country's permit allocation is indexed to its future realised GDP, can cope with uncertainties in international greenhouse emissions trading. We present some empirical foundations for intensity targets and derive a simple rule for the optimal degree of indexation to GDP. Using an 18-region simulation model of a cooperative, global cap-and-trade treaty in 2020 under multiple uncertainties and endogenous commitments, we show that optimal intensity targets could reduce the cost of uncertainty and achieve significant increases in global abatement. The optimal degree of indexation to GDP would vary greatly between countries, including superindexation in some advanced countries, and partial indexation for most developing countries. Standard intensity targets (with one-to-one indexation) would also improve the overall outcome, but to a lesser degree and not in all individual cases. Although target indexation is no magic wand for a future global climate treaty, gains from reduced cost uncertainty and the potential for more stringent environmental commitments could justify the increased complexity and other potential downsides of intensity targets.
Keywords: Climate policy; emissions trading; uncertainty; intensity targets; optimality; simulation modelling. (search for similar items in EconPapers)
JEL-codes: Q54 Q58 D80 (search for similar items in EconPapers)
Pages: 32 pages
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Journal Article: Optimal intensity targets for greenhouse gas emissions trading under uncertainty (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:anu:eenwps:0701
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