Second-best instruments for near-term climate policy: Intensity targets vs. the safety valve
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Webster_Second Best (BU).pdf
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Author(s)
Webster, Mort
Sue Wing, Ian
Jakobovits, Lisa
Date Issued
March 2010
Journal
Journal of Environmental Economics and Management
Publisher
Elsevier
Citation
Webster, Mort, Ian Sue Wing, and Lisa Jakobovits. “Second-Best Instruments for Near-Term Climate Policy: Intensity Targets vs. the Safety Valve.” Journal of Environmental Economics and Management 59, no. 3 (May 2010): 250–259.
Version
Author's final manuscript
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.
MIT Department
Massachusetts Institute of Technology. Joint Program on the Science & Policy of Global Change
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Creative Commons Attribution-Noncommercial-NoDerivatives
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DOI of Published Version
https://doi.org/10.1016/j.jeem.2010.01.002
