Mechanisms for abating global emissions under uncertainty", Economics and Environment Network Working Paper EEN0604

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. Acknowledgments: For expert guidance of this project, we thank Ken Arrow, Larry Goulder and Davi