Allocating Risks in a Domestic Greenhouse Gas Trading System

Motu Working Paper Series No. 2003-01

12 Pages Posted: 29 Sep 2003

See all articles by Suzi Kerr

Suzi Kerr

Motu Economic and Public Policy Research Trust

Date Written: March 2003


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.

Keywords: Tradeable permits, climate change, risk

JEL Classification: D44, L71, H21, H23, L51, Q250

Suggested Citation

Kerr, Suzi, Allocating Risks in a Domestic Greenhouse Gas Trading System (March 2003). Motu Working Paper Series No. 2003-01. Available at SSRN: or

Suzi Kerr (Contact Author)

Motu Economic and Public Policy Research Trust ( email )

Level 1, 93 Cuba Street
P.O. Box 24390
Wellington, 6142
New Zealand
+64 4 383 4250 (Phone)
+64 4 383 4270 (Fax)

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