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Prices vs Quantities under Severe Uncertainty

Author

Listed:
  • Brian Hill

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

Abstract

The consensus among economists in favour of carbon taxes over emissions permits is based on a groundbreaking result due to Weitzman (1974). It assumes, however, a probability distribution over abatement costs, and similarly for damages. As many have argued, current climate uncertainties are far more severe, and do not justify any such distributions. This paper reconsiders the tax-permit comparison in the presence of severe or Knightian uncertainty, drawing on the workhorse maxmin-EU model from the literature on decision under uncertainty (Gilboa and Schmeidler, 1989). Our results show that optimally set permits are strictly more efficient than optimal taxes when uncertainty concerning the slope of marginal abatement costs is severe. They suggest that, given the uncertainty reported in the latest IPCC report, permit policies are more efficient.

Suggested Citation

  • Brian Hill, 2024. "Prices vs Quantities under Severe Uncertainty," Working Papers hal-04857419, HAL.
    • Handle: RePEc:hal:wpaper:hal-04857419
    DOI: 10.2139/ssrn.4826405
    Note: View the original document on HAL open archive server: https://cnrs.hal.science/hal-04857419v1
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