Do intensity targets control uncertainty better than quotas ? Conditions, calibrations, and caveats

Policy Research Working Paper ; 4033 Présenté au 3. World Congress of Environmental and Resource Economists ; 2006/07/03-07 ; Kyoto (JPN); Among policy instruments to control future greenhouse gases emissions, well-calibrated general intensity targets are known to lead to lower uncertainty on the amount of abatement than emissions quotas (Jotzo and Pezzey, 2004). This paper tests whether this result holds in a broader framework, and whether it applies to other policy-relevant variables as well. To do so, we provide a general representation of the uncertainty on future GDP, future business-as-usual emissions and future abatement costs, and derive the variances of four variables, namely (effective) emissions, abatement effort, marginal abatement costs and total abatement costs over GDP under a quota, a linear (LIT) and a general intensity target (GIT)—where for the latter the emissions ceiling is a power-law function of GDP. We confirm that GITs can always yield a lower variance than a quota for marginal costs, but find that this is not true for total costs over GDP. Using economic and emissions scenarios and forecast errors of past projections, we estimate ranges of values for our model parameters. We find that quotas dominate LITs over most of this range, that calibrating GITs over this wide range is difficult, and that GITs would yield only modest reductions in uncertainty relative to quotas.