Uncertain long-run emissions targets, CO2 price and global energy transition: a general equilibrium approach
12:00 - 13:30
The persistent uncertainty about mid-century CO2 emissions targets is likely to affect not only the technological choices that energy-producing firms will make in the future but also their current investment decisions. We illustrate this effect on CO2 price and global energy transition within a MERGE-type general-equilibrium model frame work, by considering simple stochastic CO2 policy scenarios. In these scenarios, economic agents know that credible long-run CO2 emissions targets will be set in 2020,with two possible outcomes: either a ‘‘hard cap ’’ or a ‘‘soft cap’’. Each scenario is characterized by the relative probabilities of both possible caps. We derive consistent stochastic trajectories—with two branches after 2020—for prices and quantities of energy commodities and CO2 emissions permits. The impact of uncertain long-run CO2 emissions targets on prices and technological trajectories is discussed. In addition, a simple marginal approach allows us to analyze the Hotelling rule with risk premia observed for certain scenarios.
This seminar is based on a paper co-authores by Olivier Durand-Lasserve, Axel Pierru, and Yves Smeers.