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Ambiguity reduction by objective model selection, with an application to the costs of the EU 2030 climate targets

Author

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  • Richard Tol

    (Department of Economics, University of Sussex, Falmer, United Kingdom
    Institute for Environmental Studies and Department of Spatial Economic, Vrije Universiteit, Amsterdam, The Netherlands
    Tinbergen Institute, Amsterdam, The Netherlands
    CESifo, Munich, Germany)

Abstract
I estimate the cost of meeting the EU 2030 targets for greenhouse gas emission reduction, using statistical emulators of ten alternative models. Assuming a first-best policy implementation, I find that total and marginal costs are modest. The statistical emulators allow me to compute the risk premiums, which are small because the EU is rich and the policy impact is small. The ensemble of ten models allows me to compute the ambiguity premium, which is small for the same reason. I construct a counterfactual estimate of recent emissions without climate policy, and use that test the predictive skill of the ten models. The models that show the lowest cost of emission reduction also have the lowest skill.

Suggested Citation

  • Richard Tol, 2014. "Ambiguity reduction by objective model selection, with an application to the costs of the EU 2030 climate targets," Working Paper Series 7114, Department of Economics, University of Sussex Business School.
    • Handle: RePEc:sus:susewp:7114
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    File URL: http://www.sussex.ac.uk/economics/documents/wps-71-2014.pdf
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    References listed on IDEAS

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    1. Kolstad, Charles D., 1996. "Learning and Stock Effects in Environmental Regulation: The Case of Greenhouse Gas Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 1-18, July.
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    5. Richard Tol, 2013. "Carbon tax: Still the best way forward for climate policy," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 48(2), pages 70-71, March.
    6. Tol, Richard S.J., 2013. "Targets for global climate policy: An overview," Journal of Economic Dynamics and Control, Elsevier, vol. 37(5), pages 911-928.
    7. Richard Tol, 2012. "Leviathan carbon taxes in the short run," Climatic Change, Springer, vol. 114(2), pages 409-415, September.
    8. Martin L. Weitzman, 2009. "On Modeling and Interpreting the Economics of Catastrophic Climate Change," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 1-19, February.
    9. Antony Millner & Simon Dietz & Geoffrey Heal, 2013. "Scientific Ambiguity and Climate Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 55(1), pages 21-46, May.
    10. Frank Convery, 2009. "Origins and Development of the EU ETS," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 43(3), pages 391-412, July.
    11. Welsch, Heinz, 1995. "Greenhouse gas abatement under ambiguity," Energy Economics, Elsevier, vol. 17(2), pages 91-100, April.
    12. -, 2009. "The economics of climate change," Sede Subregional de la CEPAL para el Caribe (Estudios e Investigaciones) 38679, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
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    Cited by:

    1. Richard S. J. Tol, 2021. "Europe’s Climate Target for 2050: An Assessment," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 56(6), pages 330-335, November.
    2. Taran Fæhn, Cathrine Hagem, Lars Lindholt, Ståle Mæland, and Knut Einar Rosendahl, 2017. "Climate policies in a fossil fuel producing country demand versus supply side policies," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    3. Richard S.J. Tol, 2018. "Energy and Climate," Working Paper Series 1618, Department of Economics, University of Sussex Business School.
    4. Huntington, Hillard G., 2021. "Model evaluation for policy insights: Reflections on the forum process," Energy Policy, Elsevier, vol. 156(C).
    5. Tol, Richard S.J., 2023. "The fiscal implications of stringent climate policy," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 495-504.

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    More about this item

    Keywords

    Climate policy; European Union; carbon price; forecast skill; uncertainty;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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