The hedge value of international emissions trading under uncertainty

Mort D. Webster, Sergey Paltsev, John Reilly

Research output: Contribution to journalArticle

16 Citations (Scopus)

Abstract

This paper estimates the value of international emissions trading, focusing on a here-to-fore neglected component; its value as a hedge against uncertainty. Much analysis has been done of the Kyoto Protocol and other potential international greenhouse gas mitigation policies comparing the costs of achieving emission targets with and without trading. These studies often show large cost reductions for all Parties under trading compared to a no trading case. We investigate the welfare gains of including emissions trading in the presence of uncertainty in economic growth rates, using both a partial equilibrium model based on marginal abatement cost curves and a computable general equilibrium model. We find that the hedge value of international trading is small relative to its value in reallocating emissions reductions when the burden sharing scheme does not resemble a least cost allocation. We also find that the effects of pre-existing tax distortions and terms of trade dominate the hedge value of trading. We conclude that the primary value of emissions trading in international agreements is as a burden sharing or wealth transfer mechanism and should be judged accordingly.

Original languageEnglish (US)
Pages (from-to)1787-1796
Number of pages10
JournalEnergy Policy
Volume38
Issue number4
DOIs
StatePublished - Apr 1 2010

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emissions trading
Costs
abatement cost
terms of trade
computable general equilibrium analysis
international agreement
International cooperation
Kyoto Protocol
Cost reduction
Taxation
Greenhouse gases
cost
economic growth
greenhouse gas
mitigation
Economics
hedge
Uncertainty

All Science Journal Classification (ASJC) codes

  • Energy(all)
  • Management, Monitoring, Policy and Law

Cite this

Webster, Mort D. ; Paltsev, Sergey ; Reilly, John. / The hedge value of international emissions trading under uncertainty. In: Energy Policy. 2010 ; Vol. 38, No. 4. pp. 1787-1796.
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The hedge value of international emissions trading under uncertainty. / Webster, Mort D.; Paltsev, Sergey; Reilly, John.

In: Energy Policy, Vol. 38, No. 4, 01.04.2010, p. 1787-1796.

Research output: Contribution to journalArticle

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