Second-best instruments for near-term climate policy: Intensity targets vs. the safety valve

Mort Webster, Ian Sue Wing, Lisa Jakobovits

Research output: Contribution to journalArticlepeer-review

24 Scopus citations

Abstract

Current proposals for greenhouse gas emissions regulations in the United States mainly take the form of emissions caps with tradable permits. Since Weitzman's (1974) [3] study of prices vs. quantities, economic theory predicts that a price instrument is superior under uncertainty in the case of stock pollutants. Given the general belief in the political infeasibility of a carbon tax in the US, there has been recent interest in two other policy instrument designs: hybrid policies and intensity targets. We extend the Weitzman model to derive an analytical expression for the expected net benefits of a hybrid instrument under uncertainty. We compare this expression to one developed by Newell and Pizer (2006) [6] for an intensity target, and show the theoretical minimum correlation between GDP and emissions required for an intensity target to be preferred over a hybrid. In general, we show that unrealistically high correlations are required for the intensity target to be preferred to a hybrid, making a hybrid a more practical instrument in practice. We test the predictions by performing Monte Carlo simulation on a computable general equilibrium model of the US economy. The results are similar, and we show with the numerical model that when marginal abatement costs are non-linear, an even higher correlation is required for an intensity target to be preferred over a safety valve.

Original languageEnglish (US)
Pages (from-to)250-259
Number of pages10
JournalJournal of Environmental Economics and Management
Volume59
Issue number3
DOIs
StatePublished - May 2010

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Management, Monitoring, Policy and Law

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