 Combining Price and Quantity Controls under Partitioned Environmental RegulationSebastian Rausch and Jan Abrell No 9234, EcoMod2016 from EcoMod Abstract: This paper analyzes hybrid emissions trading systems (ETS) under partitioned environmental regulation when firms’ abatement costs and future emissions are uncertain. We show that hybrid policies that introduce bounds on the price or the quantity of abatement provide a way to hedge against differences in marginal abatement costs across partitions. Price bounds are more efficient than abatement bounds due to their ability to exploit information on firms’ abatement technologies while abatement bounds can only address emissions uncertainty. We find that introducing hybrid policies in EU ETS reduces expected excess abatement costs of achieving targeted emissions reductions under EU climate policy by up to 89 percent. We also find that under partitioned regulation there is a high likelihood for hybrid policies to yield sizeable ex-post cost reductions. We complement our theoretical analysis of hybrid policies under partitioned environmental regulation with an empirical analysis of EU climate policy investigating the question to what extent introducing hybrid policies in the EU ETS could lower the costs of achieving EU's emissions reduction goals. To this end, we develop and apply a stochastic policy optimization model with equilibrium constraints for the European carbon market that is calibrated based on empirical MAC curves derived from a numerical general equilibrium model. The model incorporates two important sources of firm-level uncertainties in the ETS and non-ETS sectors that are relevant for the policy design problem of carbon mitigation: (1) uncertainty about future “no policy intervention” emissions, reflecting uncertain output, demand, or macroeconomic shocks, and (2) uncertainty about future abatement technologies. We find that hybrid ETS policies yield substantial savings in abatement costs relative to a pure quantity based (i.e., the currently existing) EU ETS policy. Under second-best conditions, i.e. when the regulator can ex-ante choose the allocation of the emissions budget across the partitions, an optimal hybrid policy reduces the expected excess costs–relative to a hypothetical, first-best state-contingent policy–by up to 56% (or up to billion $1.5 per year). A third-best hybrid policy, i.e. assuming an exogenously given split of the emissions budget, that reflects current EU climate policy is found to lower expected excess costs by up to 89% (or up to billion $12.1 per year). Overall, we find, however, that the ability of hybrid policies to reduce expected abatement costs diminishes if sectoral baseline emissions exhibit a strong positive correlation. Further, we find that hybrid policies with price bounds are more effective to reduce the abatement costs than hybrid policies with abatement bounds. Price bounds are advantageous as they can address both types of risks whereas abatement bounds can only hedge against emissions uncertainty. Our quantitative analysis suggests that hybrid policies with price bounds are highly likely to yield sizeable ex-post savings in abatement costs, depending on the correlation structure between sectoral “no intervention” emissions. If emissions are negatively (positively) correlated, the probability of ex-post costs savings is 0.67 (0.49). Hybrid polices with abatement bounds achieve ex-post cost reductions in 66 percent of cases if baseline emissions are negatively correlated, but they yield only negligible cost savings when baseline emissions are positively correlated. The reason for this is that abatement bounds fail to exploit information on firms’ abatement technology. Keywords: European Union; Energy and environmental policy; General equilibrium modeling (CGE) (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ekd:009007:9234 Access Statistics for this paper More papers in EcoMod2016 from EcoMod Contact information at EDIRC. |
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