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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. The authors illustrate this effect on CO2 price and global energy transition within a MERGE-type general-equilibrium model framework, 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.
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