Decision making under uncertainty and inertia constraints: sectoral implications of the when flexibility

Current debates on climate mitigation emphasize the role of the inertia of the economic system. Our aim in this paper is to study in more depth how se ctorally differentiated inertia impacts on optimal CO2-emission abatement p olicies. Using the STARTS model, we show that optimal abatement levels and costs differ sensibly among sectors. Differential inertia is the critical d eterminant of this trade-off, especially in the case of a 20-year delay in the action, or in an underestimation of the growth of the transportation se ctor. In particular, the burden of any additional abatement effort falls on the most flexible sector, i.e. the industry. Debates on mitigation emphasi ze the role of inertia of the economic system. This paper aims at studying more in depth how sectorally differentiated inertia should influence optima l CO2 emission abatement policies. Using a two-sector version of STARTS, we show that under perfect expectations, optimal abatement profiles and assoc iated costs differ sensibly between a flexible and a rigid sector (transpor tation). In a second step, we scrutinize the role of the uncertainty by tes ting the case of a 20-year delay of action and an underestimated growth of the transportation sector. We do this for three concentration ceilings and we point out the magnitude of the burden which falls on the flexible sector . We derive some policy implications for the ranking of public policies and for incentive instruments to be set up at international level. (C) 1998 El sevier Science B.V. All rights reserved.