Three aspects of uncertainty-related payoff dispersion in the prices vs quantities comparison for international climate mitigation mechanisms

Abstract

We analyse three aspects in which international quantity-based mechanisms to control ghg emissions differ from international price-based mechanism: ex post dispersion of gains from participating, dispersion of overall ex post monetary payoff and dispersion of subjective ex ante utility. For a give carbon price established through a mechanism we have: The greater the ex post dispersion of gains from participating, the greater the expected number of countries that will quit the mechanism ex post. The greater the dispersion of overall ex post monetary payoff, the lower the ex ante utility, given risk aversion. The greater the dispersion in subjective ex ante utility gains from joining, the fewer countries will have an incentive to join. Based on some formal and some informal computations using bounds and plausible estimates of some variables, we obtain that prices will perform better than quantities in the first and third dimension, whilst quantities might actually perform better in the second. It seems likely that the first and third aspects are more important than the second. These considerations would thus overall weigh in favor of prices as a superior instrument for international climate mechanisms.