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Controlling total emissions under uncertainty

John Pezzey () and Frank Jotzo ()

Economics and Environment Network Working Papers from Australian National University, Economics and Environment Network

Abstract: We compare a tax with thresholds (‘prices’), and tradable permits (‘quantities’), as mechanisms to control total ‘emissions’ (or other inputs or outputs) from heterogeneous parties with uncertainties in emissions, costs and benefits. The advantage of prices over quantities is much smaller than in Weitzman’s (1974) non-tradable model. Steeper marginal benefits no longer necessarily prefer quantities; and under tradable permits, marginal cost uncertainty is an inherent benefit. For global greenhouse gas abatement by 18 regions in 2020, a tax dominates, but by much less than suggested by single-party models, especially when targets are indexed to activity levels. Provided handouts of thresholds and permits are limited, including tax interactions moderately raises the advantages of a tax, and of indexation.

Keywords: prices vs. quantities; uncertainty; heterogeneous parties; tax; tradable permits; indexed targets; greenhouse gases (search for similar items in EconPapers)
JEL-codes: D81 H23 Q58 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2007-04
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