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Worse off from reduced cost? The role of policy design under uncertain technological advancement

Matthias Weitzel ()

No 1926, Kiel Working Papers from Kiel Institute for the World Economy (IfW)

Abstract: A simple model is used to illustrate the effects of a reduction in (marginal) abatement cost in a two country setting. It can be shown that a the country experiencing a cost reduction can actually be worse off. This holds true for a variety of quantity and price based emission policies. The most important channel is that a country with lower abatement costs engages in additional abatement effort for which it is not compensated. Under a quantity based policy with a given allocation, a seller of permits can also be negatively affected from a lower carbon price. We also argue that abatement cost shocks to renewable energy and carbon capture and storage (CCS) are different in terms of their effects on international energy markets. A shock to renewable energy reduces fossil fuel rents benefiting energy importers, while the opposite holds for a shock to CCS. The channels obtained in the theoretical model can be confirmed in a more complex global computable general equilibrium model. Some regions are indeed worse off from shock that lowers their abatement costs.

Keywords: climate policy; prices vs. quantities; renewable energy; CCS; technological uncertainty; CGE model (search for similar items in EconPapers)
JEL-codes: C68 Q54 Q58 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1926

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