Rules vs. Targets: Climate Treaties Under Uncertainty

Center of Economic Research at ETH Zurich (CER-ETH) Working Paper No. 12/159

48 Pages Posted: 13 Apr 2012

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Quirin Oberpriller

affiliation not provided to SSRN

Date Written: April 13, 2012

Abstract

We demonstrate the advantages of a climate treaty based solely on rules for international permit markets when there is uncertainty about abatement costs and environmental damages. Such a ‘Rules Treaty’ comprises a scaling factor and a refunding rule. Each signatory can freely choose the number of permits it allocates to domestic firms. For every permit so issued, an international agency is allowed to issue additional permits in accordance with the scaling factor. The agency auctions all additional permits and refunds all the revenues to the signatories according to the refunding rule. Our main finding is that for a sufficiently large scaling factor, the Rules Treaty approximates the globally optimal outcome in every state of the world. In this sense, newly arriving information is optimally processed. This is in stark contrast to treaties based on emission targets, even if countries fully comply with such targets. If countries are sufficiently homogeneous there exists, moreover, a refunding rule under which every country that abates more under the treaty than in the status quo ante can be compensated, so that all countries will participate voluntarily. If, however, countries are rather heterogeneous, some may decline to participate.

Keywords: Rules Treaties, Target Treaties, Climate Change, Uncertainty, Global Refunding Scheme, International Permit Markets

JEL Classification: D81, H23, H41, Q54

Suggested Citation

Gersbach, Hans and Oberpriller, Quirin, Rules vs. Targets: Climate Treaties Under Uncertainty (April 13, 2012). Center of Economic Research at ETH Zurich (CER-ETH) Working Paper No. 12/159. Available at SSRN: https://ssrn.com/abstract=2039368 or http://dx.doi.org/10.2139/ssrn.2039368

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
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IZA Institute of Labor Economics

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Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Quirin Oberpriller

affiliation not provided to SSRN ( email )

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