International climate change policy instruments and policy assessment under uncertainty

Uncertainty about the process of climate change and the ability to learn more about the process over time means that there is a sequential decision problem. A key dilemma is the optimal timing of mitigation action. Even if there was agreement about the form of the possible states of the world and their probabilities of occurring, countries and individuals may still disagree on the timing and extent of-costly action. Such differences would stem from differences in attitudes toward risk and the willingness to trade off the welfare of the current against future generations. Uncertainty means that it would be optimal to adopt a portfolio of policies. In this paper the concern is solely with mitigation policies. There is wide agreement that 'no regrets' options should be adopted first. However, there is much dispute about the scope for 'no regrets' options in developed economies. For costly mitigation policies, it Is argued that there are efficiency gains from market-based policies over a regulatory approach. The major choice is between taxes and tradable quotas. There are a number of issues on which an attempt can be made to discriminate between taxes and quotas. It is argued that no firm conclusions can be drawn in favour of one instrument or the other on all bur one of these issues in the current state of knowledge. The one issue in which quotas appear to have a distinct advantage is their potential to be developed as a risk management tool.