Back

Second-Best Instruments for Near-Term Climate Policy: Intensity Targets vs. the Safety Valve

Mort Webster, Ian Sue Wing and Lisa Jakobovits

Journal of Environmental Economics and Management, Vol. 59, No. 3, pp. 250

Mort Webster, Ian Sue Wing and Lisa Jakobovits, Journal of Environmental Economics and Management, Vol. 59, No. 3, pp. 250259, 2010

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) 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) 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.

For Sponsors Only

As a benefit to our Associates, the latest Working Papers are embargoed for a period of up to six months before becoming accessible to the public. If you are interested in becoming an Associate or learning more about the benefits of sponsorship, please click here.