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Allocating Risks in a Domestic Greenhouse Gas Trading System

Author

Listed:
  • Suzi Kerr

    (Motu Economic & Public Policy Research Trust)

Abstract
As tradeable permit programmes mature, two inter-related issues are becoming more critical in creating viable responses to a long-term, highly uncertain environmental problem such as climate change. First, we need to update policies in response to new information; and second, we need to design policies so that they can be updated without creating adverse strategic incentives for either government or regulated entities. Consideration of both exogenous risk (uncontrollable) and endogenous risk (concerns about policy credibility) suggests that permits should be auctioned several years in advance of use, and each permit should be defined as a percentage of a possibly varying target. For exogenous risks, this system allows all risk to be pooled and managed as efficiently as possible within the private sector. For endogenous risk, it creates a vested interest that will pressure government to maintain or strengthen targets to offset the obvious pressures to weaken regulation. It also reduces the ability of government to reallocate rents without cost to itself, or to gain revenue by altering targets. In addition, policy should be made as complete and as transparent as possible, and its key elements should be embedded in legislation to limit prospects for capricious changes in the future.

Suggested Citation

  • Suzi Kerr, 2003. "Allocating Risks in a Domestic Greenhouse Gas Trading System," Others 0309003, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpot:0309003
    Note: Type of Document - PDF; prepared on Windows PC; to print on HP; pages: 12 ; figures: included
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/othr/papers/0309/0309003.pdf
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    References listed on IDEAS

    as
    1. Cramton, Peter & Kerr, Suzi, 2002. "Tradeable carbon permit auctions: How and why to auction not grandfather," Energy Policy, Elsevier, vol. 30(4), pages 333-345, March.
    2. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
    3. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
    4. Kenneth J. Arrow & Robert C. Lind, 1974. "Uncertainty and the Evaluation of Public Investment Decisions," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 3, pages 54-75, Palgrave Macmillan.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Michelle Poland & David C Maré, 2005. "Defining Geographic Communities," Urban/Regional 0509016, University Library of Munich, Germany.
    2. Grimes, Arthur, 2005. "Regional and industry cycles in Australasia: Implications for a common currency," Journal of Asian Economics, Elsevier, vol. 16(3), pages 380-397, June.
    3. Arthur Grimes, 2006. "Intra & inter-regional industry shocks: A new metric with application to Australasian currency union," New Zealand Economic Papers, Taylor & Francis Journals, vol. 40(1), pages 23-44.
    4. David C Maré, 2005. "Indirect Effects of Active Labour Market Policies," HEW 0509004, University Library of Munich, Germany.
    5. Isabelle Sin & Suzi Kerr & Joanna Hendy, 2005. "Taxes vs Permits: Options for Price-Based Climate Change Regulation," Treasury Working Paper Series 05/02, New Zealand Treasury.

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    More about this item

    Keywords

    tradeable permits; climate change; risk;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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