Incentive Based Climate Policies under Uncertainty

Studenteropgave: Kandidatspeciale og HD afgangsprojekt

  • William Tinglef
4. semester, Samfundsøkonomi (cand.oecon), Kandidat (Kandidatuddannelse)
The project considers incentive based climate policy under uncertainty. It considers how tax programmes and permit programmes perform when uncertainty about the future is introduced. When there is no uncertainty, tax programmes and permit programmes yield the same result. It is argued that climate change is uncertain and may carry big irreversible damages, which may be an argument for a precautious policy. When uncertainty is introduced, the result of taxes and permits differs. Taxes perform better in the short run and permits perform better in the long run. People’s time preferences become important, when the dynamics of climate change is introduced. A high discount rate seems to favour a tax programme, as its lowers the uncertainties about the abatement costs, and a low discount rate seems to favour a permit programme, as uncertainty about the future matters when it is not discounted. Furthermore it is discusses how different parameters affect the model result. Lastly the price level of tax and permits is considered. It is argued that a precautious policy may seem reasonable, which leads to a sharp rise in emission reduction. Other views argue that the abatement cost is too high compared to damages primarily because they assume high discount rates. The main result is that a permit programme seems to be better in tackling uncertainty about the future, as its sets the emission directly so that there is less uncertainty about the damages in future. It finds that if the government is concerned with short-term price fluctuations, it may be possible to use a hybrid that sets a price valve on the permits. The second result is that a precautious policy seems reasonable, as there may be big irreversible damages in future, which lead to a high abatement.
Antal sider93
Udgivende institutionAalborg Universitet
ID: 18019416