Efficiency Gains from “What”-Flexibility in Climate Policy An Integrated CGE Assessment

We investigate the importance of “what”-flexibility on top of “where”and “when”-flexibility for alternative emission control schemes that prescribe long-term temperature targets and eventually impose additional constraints on the rate of temperature change. We find that “what”-flexibility substantially reduces the compliance costs under alternative emission control schemes. When comparing policies that simply involve long-term temperature targets against more stringent strategies that include additional constraints on the rate of temperature increase, it turns out that the latter involve huge additional costs. These costs may be interpreted as additional insurance payments if damages should not only dependent on absolute temperature change but also on the rate of temperature change. JEL classification: D58; Q43