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CICERO Working Paper 2001:2

Decision-making frameworks for climate policy under uncertainty

H. Asbjørn Aaheim and Camilla Bretteville February 20, 2001

CICERO

Center for International Climate and Environmental Research

P.O. Box 1129 Blindern N-0318 Oslo, Norway Phone: +47 22 85 87 50

Fax: +47 22 85 87 51 E-mail: [email protected]

Web: www.cicero.uio.no

CICERO Senter for klimaforskning P.B. 1129 Blindern, 0318 Oslo

Telefon: 22 85 87 50 Faks: 22 85 87 51 E-post: [email protected]

Nett: www.cicero.uio.no

(2)

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(7)

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(8)

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(9)

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(10)

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(11)

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(13)

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(14)

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(16)

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(18)

FLFHUR Zrunlqj Sdshu 5334=5 4:

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(19)

FLFHUR Zrunlqj Sdshu 5334=5 4;

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(20)

FLFHUR Zrunlqj Sdshu 5334=5 4<

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(21)

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Wklv lv d ghflvlrq fulwhulrq zkhuh wkh ohyho ri dedwhphqw lv fkrvhq wr pd{lpl}h d zhljkhg dyhudjh ri wkh vrfldo zhoiduh lq wkh ehvw dqg wkh zruvw vwdwh=

pd{D

qplqv ^z+D> v,` . +4, pd{v ^z+D> v,`r

(22)

FLFHUR Zrunlqj Sdshu 5334=5 54

α

Alt. 1: Abatement if y 13 38 59 90 121 152 168

Alt. 2: Abatement if y 12 929 2762 4596 6429 8263 9180

Iljxuh 7= Dedwhphqw fulwhuld iru dowhuqdwlyh xqghu jhqhudol}hg plql0 pd{2pd{lpd{

Rqh lqwhusuhwdwlrq ri wkh vl}h rilv wkdw lw uh hfwv wkh ghflvlrq pdnhu*v eholhiv derxw wkh olnholkrrg ri idflqj wkh zruvw fdvh lq wkh ixwxuh1 Wkh jhqhudol}hg pd{lplq2pd{lpd{ lv wkhq mxvw d vlpsolfdwlrq ri wkh h{shfwhg xwlolw| fulwhulrq1 Zkhq ghwhuplqlqj> kh fdq hlwkhu qg wkh ehvw dqg wkh zruvw fdvh zlwk ds0 sxuwhqdqw vxemhfwlyh suredelolwlhv/ ru kh fdq glylgh doo srvvleoh rxwfrphv lqwr wzr jurxsv 0 wkh edg rxwfrphv dqg wkh ehwwhu rxwfrphv 0 dqg zloo eh wkh suredelolw| ri uhdol}lqj rqh ri wkh edg vwdwhv1

Uhihuulqj wr wkh h{dpsoh/ zh slfn rxw wkh ehvw dqg wkh zruvw fdvhv lq wkh wzr dowhuqdwlyhv1 Wkh fulwlfdo ydoxh ri dedwhphqw frvwv zloo reylrxvo| ghshqg rq wkh vl}h ri / dqg lv vkrzq lq jxuh 71 Iru dowhuqdwlyh 4/ wkh uhphgldo srolf| zloo eh lpsohphqwhg li | 46 eloolrq XVG li @ 3+qr zhljkw lv sxw rq wkh zruvw fdvh,/ dqg li | 49; eloolrq XVG li @ 4 +doo zhljkw lv sxw rq wkh zruvw fdvh/ zklfk frlqflghv zlwk pd{lplq,1 Wkh fulwlfdo ydoxh ri | lq dowhuqdwlyh 5 udqjhv iurp45wr<4;31 Lilv fkrvhq vxfk dv wr fruuhvsrqg zlwk wkh suredelolw| glvwulexwlrq lq dowhuqdwlyh 5/ wkhq@ 3=3461 Wkh jhqhudol}hg pd{lplq2pd{lpd{ fulwhulrq wkhq suhvfulehv dedwhphqw li| 459eloolrq XVG/

zklfk djdlq lv ohvv uhvwulfwlyh wkdq wkh h{shfwhg xwlolw| fulwhulrq*v ;9 eloolrq XVG1 Li zh xvh dowhuqdwlyh 4*v fruuhvsrqglqj zhljkw/ krzhyhu/@ 3=76/ zh jhw wkh voljkwo| vwulfwhu fulwlfdo ydoxh | ;31 Rewdlqlqj wkh h{shfwhg xwlolw| ohyho iru wkh fulwlfdo|/ uhtxluhv d eholhi derxwri 3=7: iru dowhuqdwlyh 4/ dqg3=33;

iru dowhuqdwlyh 51 Wkxv/ li dowhuqdwlyh 5 dssolhv/ wkh fulwlfdo ydoxh ri lpsrvlqj folpdwh fkdqjh uhphgldo dfwlrq lv ohvv uhvwulfwlyh wkdw zlwk h{shfwhg xwlolw| li wkh suredelolw| ri d fdwdvwurskh lv ohvv wkdq3=33;1 Wklv looxvwudwhv krz vhqvlwlyh wkh jhqhudol}hg pd{lplq2pd{lpd{ fulwhulrq lv wr wkh srvvlelolw| ri d fdwdvwurskh1 Uhfdoo wkdw wkh suredelolw| ri wkh zruvw fdvh lq dowhuqdwlyh 5 lv3=3458/ zklfk lv pruh wkdq rqh dqg d kdoi wlphv3=33;1

71616 Olplwhg ghjuhh ri frqghqfh

Olplwhg ghjuhh ri frqghqfh lpsolhv wkdw wkh ghflvlrq pdnhu pd{lpl}hv d zhljkhg vxp ri wkh h{shfwhg xwlolw| fulwhulrq dqg wkh pd{lplq fulwhulrq=

pd{D

qHv^z+D> v,` . +4, pd{v ^z+D> v,`r

@ ^3>4`phdvxuhv wkh ghflvlrq pdnhu*v ghjuhh ri frqghqfh lq wkh suredelolw|

glvwulexwlrq xqghuo|lqjHvz1 Lq wkh fdvh ri ixoo frqghqfh/ @ 4/ kh zloo xvh

(23)

FLFHUR Zrunlqj Sdshu 5334=5 55

γ

Alt. 1: Abatement if y 168 160 143 127 110 94 86

Alt. 2: Abatement if y 9180 8270 6451 4633 2814 995 86

Iljxuh 8= Dedwhphqw fulwhuld iru dowhqdwlyh fkrlfhv ri xqghu olplwhg ghjuhh ri frqghqfh

wkh h{shfwhg xwlolw| fulwhulrq/ zkhuhdv xqghu frpsohwh xqfhuwdlqw|/ @ 3/ wkh pd{lplq ghflvlrq uxoh lv dssolhg1 Wkxv/4 uhsuhvhqwv wkh ghflvlrq pdnhu*v eholhiv lq wkh xqfhuwdlqw| ri wkh hvwlpdwhg xqfhuwdlqw|/ l1h1 wkh ghjuhh ri ljqr0 udqfh1 Lq wklv lqwhusuhwdwlrq/ xqfhuwdlqw| lv vlpso| wkh frxqwhusduw ri frqghqfh lq wkh suredelolvwlf dvvhvvphqw xqghuo|lqj wkh h{shfwhg xwlolw| fdofxodwlrq + ^:`/

^5:`,1Uhwxuqlqj wr rxu vlpsoh h{dpsoh/ zh vhh wkdw wkh fulwlfdo ydoxh ri dedwh0 phqw frvwv vsdqv iurp wkh pd{lplq ydoxh wr wkh h{shfwhg xwlolw| ydoxh/ dqg wkh orzhu wkh frqghqfh lq wkh suredelolw| glvwulexwlrq/ wkh kljkhu wkh zloolqjqhvv wr sd| iru hplvvlrq uhgxfwlrqv1

71617 Pd{lplq uhjuhw

pd{lplq uhjuhw +ru orvv, dlpv dw plqlpl}lqj wkh glhuhqfh ehwzhhq wkh ehvw wkdw frxog kdsshq dqg zkdw dfwxdoo| kdsshqv ^44`1 Wkh ghflvlrq pdnhu wulhv wr plqlpl}h klv uhjuhwv iru qrw kdylqj/ lq klqgvljkw/ pdgh wkh vxshulru fkrlfh1 Wklv frxog eh lqwhusuhwhg dv fkrrvlqj wkh rswlrq zklfk wkh ghflvlrq pdnhu eholhyhv ixwxuh jhqhudwlrqv zrxog ohdvw uhjuhw=

plq| q

pd{v ^z+|+v,> v,z+|> v,`r

Ohw|+v,eh wkh rswlpdo fkrlfh ri dedwhphqw li zh nqhz iru fhuwdlq wkdwvzloo rffxu1 Wkh whup |+v, uhsuhvhqwv/ lq rwkhu zrugv/ wkh dedwhphqw wkdw zrxog kdyh ehhq fkrvhq li zh nqhz lq dgydqfh zkdw zrxog kdsshq1 Vlqfhvlv xqnqrzq h{ dqwh/ zh zloo suredeo| fkrrvh dqrwkhu ohyho ri dedwhphqw/ ghqrwhg|1 Wkh pd{lplq uhjuhw fulwhulrq vd|v wkdw wkhh{ dqwh fkrlfh ri| vkrxog eh fkrvhq lq rughu wr pdnh wkh ixwxuh orvv/ lq wkh fdvh zkhuh |rxu ghflvlrq lv dv edg dv lw fdq eh/ dv vpdoo dv srvvleoh1 Wklv lv wkxv d zd| wr plqlpl}h wkh fkdqfh ri pdnlqj d pdmru plvwdnh1 Lq rughu wr qg wkh suhihuuhg srolf|/ wkh srolf| pdnhu pxvw suhglfw dqg frpsduh wkh pd{lpdo uhjuhwv iru doo srvvleoh srolf| fkrlfhv1

Iru rxu h{dpsoh/ wkh pd{lplq uhjuhw frvw pdwul{ zloo eh dv vkrzq lq jxuh 91 Wkh qxpehuv lq wkh pdwul{ duh irxqg lq wkh iroorzlqj zd|= Wdnh iru lqvwdqfh wkh srvvleoh vwdwh ri kljk hplvvlrqv dqg kljk lqfuhdvh lq whpshudwxuh +KK,1 Wkh pd{lpdo uhjuhw zloo ghshqg rq wkh dedwhphqw frvw | +uhphpehu wkdw | lv dq devroxwh ydoxh,1 Orrnlqj dw dowhuqdwlyh 4/ wkh uhjuhw zloo eh wkh qhw ehqhw iurp dedwhphqw> wkh gdpdjh zkhq qr dfwlrq lv wdnhq/635=7/ plqxv wkh gdpdjh wkdw lv idfhg zkhq dfwlrq lv wdnhq/467=7/ dqg plqxv wkh frvw ri dedwhphqw/|/ qdpho|

(24)

FLFHUR Zrunlqj Sdshu 5334=5 56

&IPMIJWERH

WXVEXIKMIW7XEXIW ,, ,0 0, 00 1E\VIKVIX

%PXRSEFEXIQIRX QE\r] QE\r] QE\r] QE\r] QE\r]

%PXEFEXIQIRX QE\] QE\] QE\]r QE\]r QE\]r

%PXRSEFEXIQIRX QE\r] QE\r] QE\r] QE\r] QE\r]

%PXEFEXIQIRX QE\]r QE\] QE\] QE\]r QE\]

Iljxuh 9= Dedwhphqw dffruglqj wr wkh plqlpd{ uhjuhw fulwhuld

49;|/ ru lw zloo eh }hur iru vx!flhqwo| odujh|1 Iru vx!flhqwo| odujh frvwv/

dedwhphqw vkrxog qrw eh fkrvhq dqg wkh ghflvlrq pdnhu vkrxog kdyh qr uhjuhwv derxw fkrrvlqj qr dfwlrq1 Wkh uhjuhw jlyhq dowhuqdwlyh 4 zlwk qr dedwhphqw lv wkxv wkh pd{lpxp ri49;|dqg31 Li wkh vwdwh kljk hplvvlrqv dqg orz lqfuhdvh lq whpshudwxuh +KO, vkrxog rffxu/ wkh uhjuhw zrxog eh wkh pd{lpxp ri9:| dqg3/ hwf1 Wkh pd{lpdo uhjuhw iru d vwudwhj| lv irxqg e| frpsdulqj wkh uhjuhwv lq hdfk vwdwh1 Li rqh eholhyhv lq dowhuqdwlyh 4 dqg frqvlghuv fkrrvlqj qr dfwlrq/

wkh pd{lpdo uhjuhw zrxog wkxv eh wkh pd{lpxp ri49;| dqg31

Jlyhq dowhuqdwlyh 4 dqg dedwhphqw/ wkh uhjuhw lq wkh vwdwh KK lv wkh pd{l0 pxp ri3dqg|49;> iru vx!flhqwo| kljk frvwv wkh ghflvlrq pdnhu zloo uhjuhw fkrrvlqj dedwhphqw/ dqg wkh uhjuhw zloo eh wkh dedwhphqw frvw plqxv wkh dyrlghg gdpdjh1 Wkxv/ li rqh eholhyhv lq dowhuqdwlyh 4 dqg frqvlghuv fkrrvlqj dedwhphqw/

wkh pd{lpxp uhjuhw zrxog eh wkh pd{lpxp ri3dqg|461 Wkh qxpehuv iru dowhuqdwlyh 5 lv irxqg lq d vlplodu idvklrq1

Wkh suhihuuhg srolf| lv irxqg e| frpsdulqj wkh pd{lpxp uhjuhwv dqg fkrrv0 lqj wkh plqlpxp1 Wkh uhvxow zloo qdwxudoo| ghshqg rq|/ dqg iru dowhuqdwlyh 4 zh jhw wr fkrrvh vwudwhj| lq rughu wr

plqD

qpd{v ^+49;|>3,>+3> |46,`r

Wkh fulwhulrq vd|v/ zkhq dssolhg wr rxu h{dpsoh/ wkdw li| 49;/ wkh ghflvlrq pdnhu vkrxog fkrrvh dedwhphqw1 Iru dowhuqdwlyh 5/ wkh fulwlfdo ydoxh iru fkrrvlqj dedwhphqw lv|<4;31 Wklv lv wkh vdph dv iru pd{lplq uhjuhw1

71618 Vdihw| uvw

Dqrwkhu zd| ri vkrzlqj suhfdxwlrq lv e| orzhulqj wkh suredelolw| ri d wrr orz zhoiduh ohyho lq wkh ixwxuh +vhh iru lqvwdqfh Udzov ^56`, 1 Khuh duh wzr dowhuqd0 wlyhv=

plqD

qSuv ^z+D> v,n`r

pd{D iHvz+D> v,j v=w=Suv ^z+D> v,n`

(25)

FLFHUR Zrunlqj Sdshu 5334=5 57

Wkh uvw dowhuqdwlyh/ d suredelolvwlf qrq0h{shfwhg xwlolw| fulwhulrq/ plqlpl}hv wkh suredelolw| ri wkh zhoiduh ehlqj ohvv wkdq vrph frqvwdqw n1 Wkh vhfrqg dowhuqdwlyh pd{lpl}hv wkh h{shfwhg vrfldo zhoiduh/ vxemhfw wr d frqvwudlqw/ zklfk vd|v wkdw wkh suredelolw| ri wkh zhoiduh ehlqj ohvv wkdqnvkrxog eh ohvv wkdq1 Wkh vdihw| uvw fulwhuld srvh txhvwlrqv derxw krz wr ghwhuplqh n dqg 1 Zkdw ghwhuplqhv wkh dffhswdeoh vl}h ri/ wkh suredelolw| ri wkh ixwxuh zhoiduh ehlqj ohvv wkdwnB Krz olnho| fdq lw ehB Wklv txhvwlrq pljkw ghshqg rq wkh vl}h rin1 Krz orz d zhoiduh fdq zh dffhswB Wklv lv djdlq ghshqghqw rq zkhwkhu ru qrwnphdvxuhv wkh zhoiduh rq dyhudjh1 Li vr/ lv wklv d zhljkhg dyhudjh/ dqg krz wkhq duh wkh zhljkwv ghwhuplqhgB Dqg zklfk ohyho ri djjuhjdwlrq lv dssolhgB Lv n d zhljkhg vxp ri hdfk jurxs/ odqg ru uhjlrqB Lq dgglwlrq/ hyhq li n dqg duh ghwhuplqhg/ idflqj wkh xqfhuwdlqw|/ krz fdq wkh ghflvlrq pdnhu nqrz wkdw d fhuwdlq srolf| ghflvlrq zloo vdwlvi| wkh frqvwudlqwvB

Dqrwkhu vdihw| uvw dssurdfk lv wr kdyh frqvwudlqwv rq wkh zhoiduh ri wkh zruvw r jurxs/ odqg ru uhjlrq1 Rqh h{dpsoh pljkw eh=

pd{D iHvz+D> v,j v=w=q Suv

kplq

l zl+D> v,nl r

Qrz wkh ghflvlrq0pdnhu pd{lpl}hv wkh h{shfwhg ixwxuh vrfldo zhoiduh vxemhfw wr wkh suredelolw| ri wkh zhoiduh ri wkh zruvw r/ ehlqj ohvv wkdq1 Li@ 3wkh frqvwudlqw fdq eh lqwhusuhwhg dv d rru1 Lin lv fkrvhq surshuo|/ wklv fulwhulrq zloo hqvxuh lqwhujhqhudwlrqdo htxlw| dqg vxvwdlqdeoh ghyhorsphqw1 Orrvho| vsr0 nhq/ vxvwdlqdeoh ghyhorsphqw ghpdqgv wkdw hdfk jhqhudwlrq xvh qr pruh wkdq wkhlu ohjlwlpdwh vkduh ri wkh zruog*v uhvrxufhv ^4`1 Li rqh ru vhyhudo jhqhudwlrqv frqvxph pruh wkdq wkhlu ohjlwlpdwh vkduh/ ru wkhlu frqvxpswlrq jhqhudwhv wrr pxfk srooxwlrq/ wkh frqvxpswlrq srvvlelolwlhv ri odwhu jhqhudwlrqv zloo eh xq0 ghuplqhg1 Wkhq/ odwhu jhqhudwlrqv pljkw qrw eh deoh wr uhdfk wkh vrfldo zhoiduh ohyhon/ dqg wkh fulwhulrq lv ylrodwhg1 Wklv lv dovr nqrzq dv wkh kljkhvw frqvwdqw frqvxpswlrq fulwhulrq ^59`1

717 Dssolfdelolw| ri dowhuqdwlyh ghflvlrq fulwhuld

Xvlqj wkh wkhru| ri h{shfwhg xwlolw| dv d edvlv iru ghflvlrq pdnlqj uhtxluhv wkh ghflvlrq pdnhu wr kdyh frpsohwh ryhuylhz ri srvvleoh vwdwhv ri qdwxuh dqg wkhlu suredelolwlhv1 Jlyhq wkh xqfhuwdlqw| vwuxfwxuh ri wkh folpdwh sureohp/ wklv lv d yhu| vwurqj dvvxpswlrq1 \hw/ h{shfwhg xwlolw| ru zhoiduh pd| surylgh dq dghtxdwh iudphzrun iru h{sodlqlqj dqg suhglfwlqj vrfldo fkrlfh lq xqfhuwdlq vlw0 xdwlrqv1 Zkhq xvlqj rwkhu fulwhuld/ vlplodu lqirupdwlrq sureohpv pxvw eh idfhg1 Ixuwkhupruh/ hyhq li lqglylgxdov sodfh lqfuhdvhg zhljkwv rq orz0suredelolw| h{0 wuhph hyhqwv/ wklv grhv qrw phdq wkdw wkh ghflvlrq pdnhu vkrxog gr wkh vdph1

Xvlqj pd{lplq wr ghwhuplqh dedwhphqw srolf| uh hfwv dq h{wuhph ihdu ri wkh zruvw fdvh1 Nqrzlqj wkh qdwxuh ri wkh zruvw fdvh lv dovr sureohpdwlf1 Zkdw lv wkh zruvw wkdw fdq kdsshq dv d frqvhtxhqfh ri pdq0pdgh folpdwh fkdqjhB Dqvzhulqj wklv txhvwlrq lv kdug1 Diwhu doo/ zh duh qrw rqo| idfhg zlwk xqfhu0 wdlqwlhv uhjduglqj wkh pdjqlwxgh ri folpdwh fkdqjh lpsdfwv/ exw dovr uhjduglqj zklfk lpsdfwv wr h{shfw1 Dqrwkhu sureohp lv wkdw wkh zruvw fdvh pljkw eh vr

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