In or out: efficient inclusion of installations in an emissions trading scheme? |
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Authors: | Regina Betz Todd Sanderson Tihomir Ancev |
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Institution: | (1) Programme International Climate Policy, Hamburg Institute of International Economics (HWWA), Neuer Jungfernstieg 21 20347, Hamburg, Germany |
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Abstract: | Regulators around the world are currently considering national emissions trading schemes (ETS) as cost-effective instruments
to reduce greenhouse gas emissions. In the process, they are confronted with numerous design issues. The coverage of installations
in an ETS is one such issue. While “blanket coverage” that includes all industrial emitters of greenhouse gases in an economy
has some intuitive appeal, and seems equitable, it does not take into full account all the costs related to the extent of
coverage. This paper shows that an alternative approach of “partial coverage” based on benefit–cost analysis can achieve the
same emission reduction outcome at lower social cost. The approach is based on maximizing the benefits from inclusion of installations
in an ETS at the same time as taking all relevant transaction costs into account. A broad definition of transaction costs
is used, which covers the regulatory costs to the government as well as regulatory costs imposed on covered installations.
We find that particularly for relatively modest emissions reduction targets the cost savings of a “partial coverage” compared
to “blanket coverage” are significant. |
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