The Law of Small Abatements: Prices over Quantities in Realistic Climate Policies
Series
Economics Discussion Papers
Type
working paper
Date Issued
2011
Author(s)
Habermacher, Florian
Abstract
A fundamental question of high practical relevance for climate policy design is whether price
controls such as CO2 taxes, or quantity restrictions such as emission quotas should be
preferred.
I show that as the reach of climate policies is limited in terms of either suboptimally low
reduction targets or the policy's extent over only parts of the world, the likelihood of price
measures to be more advantageous in terms of minimizing uncertainty related welfare losses
increases. The increase of the relative advantage of the price mechanisms over quantity
measures may be more than proportional to the regional limitedness of the policy,
suggesting that even for relatively important climate coalitions the identified factor implies a
clear advantage for price measures.
This analysis of the prices vs. quantities question is closer to so far on a high political level
seriously discussed climate policies, not to speak of already implemented local or regional
climate policies, than previous theoretical literature addressing the issue, which typically
relied on the assumption of first bests (i.e. global) policies. Illustrating the main thought of
the analysis, I explain why in the example of policies with an extent corresponding to the
current Kyoto mechanism, the simple theoretical weighting of the price vs. the quantity
approach seems to favor price mechanisms independently of the exact form of the global
abatement cost and benefit curves
controls such as CO2 taxes, or quantity restrictions such as emission quotas should be
preferred.
I show that as the reach of climate policies is limited in terms of either suboptimally low
reduction targets or the policy's extent over only parts of the world, the likelihood of price
measures to be more advantageous in terms of minimizing uncertainty related welfare losses
increases. The increase of the relative advantage of the price mechanisms over quantity
measures may be more than proportional to the regional limitedness of the policy,
suggesting that even for relatively important climate coalitions the identified factor implies a
clear advantage for price measures.
This analysis of the prices vs. quantities question is closer to so far on a high political level
seriously discussed climate policies, not to speak of already implemented local or regional
climate policies, than previous theoretical literature addressing the issue, which typically
relied on the assumption of first bests (i.e. global) policies. Illustrating the main thought of
the analysis, I explain why in the example of policies with an extent corresponding to the
current Kyoto mechanism, the simple theoretical weighting of the price vs. the quantity
approach seems to favor price mechanisms independently of the exact form of the global
abatement cost and benefit curves
Language
English
Keywords
prices versus quantities
greenhouse gas tax
emission quotas
tradable permits
uncertainty
emission abatement costs
climate change costs
emission abatement benefits
regional climate policy
unilateral climate policy
HSG Classification
contribution to scientific community
Refereed
No
Publisher
Department of Economics, University of St. Gallen (HSG)
Publisher place
St. Gallen
Number
1118
Subject(s)
Division(s)
Eprints ID
116746