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Early Emission Reduction Programs: An Application to CO2 Policy

Abstract:
In the wake of the 1997 Kyoto Protocol, which if implemented would oblige industrialized countries to meet targets for greenhouse gases (GHGs) In 2008-2012, there have been several proposals to reduce emissions during the interim period. A concern for early reduction also arises in other policy contexts. This paper uses a series of simple models and numerical illustrations to analyze voluntary early reduction credits for GHGs. We examine several issues that affect the economic performance of these policies, including asymmetric information, learning-by-doing, and fiscal impacts, and we compare their performance with that of an early cap-and-trade program. We find that the economic benefits of early credit programs are likely to be limited, unless these credits can be banked to offset future emissions. Such banking was not allowed under the Kyoto Protocol. An early cap-and-trade program can avoid many of the problems of early credits, provided it does not require excessive abatement.

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Energy Specializations: Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Environmental Market Design; Energy and the Environment – Policy and Regulation

JEL Codes: Q54: Climate; Natural Disasters and Their Management; Global Warming, Q52: Pollution Control Adoption and Costs; Distributional Effects; Employment Effects, D21: Firm Behavior: Theory, D22: Firm Behavior: Empirical Analysis

Keywords: Early reduction credits, carbon emissions, welfare impacts, permit banking, cap-and-trade, greenhouse gas policy

DOI: 10.5547/ISSN0195-6574-EJ-Vol23-No1-4

Published in Volume23, Number 1 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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