Working Paper: CEPR ID: DP2514
Authors: Paolo Buonanno; Carlo Carraro; Efrem Castelnuovo; Marzio Galeotti
Abstract: In this paper we use a simple climate model with endogenous environmental technical change in order to analyse the effects on equity and efficiency of different degrees of restrictions on trade in the market for pollution permits. The model is obtained by incorporating in Nordhaus and Yang (1996)?s RICE model and the notion of induced technical change as proposed in Goulder and Mathai (1998). With the help of such a model we aim at assessing the pros and cons of the introduction of ceilings on emission trading. In particular, we analyse the implications of restrictions on trading both in terms of their cost effectiveness and in terms of their distributional effects. The analysis takes into account the role of environmental technical change that could be enhanced by the presence of ceilings on trading. However, this effect is shown to be offset by the increased abatement cost induced by the larger than optimal adoption of domestic policy measures when ceilings are binding. Hence, our analysis provides little support in favour of quantitative restrictions on emission trading even when these restrictions actually have a positive impact on technical change. Even in terms of equity, ceilings find no justification within our theoretical and modelling framework. Indeed, we find that flexibility mechanisms in the presence of endogenous technical change increase equity and that the highest equity levels are achieved without ceilings, both in the short and in the long run.
Keywords: ceilings; climate policy; emission trading; environmental modelling; technical change
JEL Codes: H00; H20; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| R&D efforts (O32) | demand for permits (R48) |
| ceilings on emissions trading (Q58) | R&D expenditures in developed countries (O32) |
| ceilings on emissions trading (Q58) | abatement costs (Q52) |
| ceilings on emissions trading (Q58) | economic growth (O49) |
| R&D expenditures in developed countries (O32) | abatement costs (Q52) |
| ceilings on emissions trading (Q58) | equity (D63) |
| no ceilings (Y70) | equity (D63) |