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Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy

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  • Kyle C. Meng

Abstract

This paper develops a method for forecasting the marginal abatement cost (MAC) of climate policy using three features of the failed Waxman-Markey bill. First, the MAC is revealed by the price of traded permits. Second, the permit price is estimated using a regression discontinuity design (RDD) comparing stock returns of firms on either side of the policy’s free permit cutoff rule. Third, because Waxman-Markey was never implemented, I extend the RDD approach to incorporate prediction market prices which normalize estimates by policy realization probabilities. A final bounding analysis recovers a MAC range of $5 to $19 per ton CO2e.

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  • Kyle C. Meng, 2016. "Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy," NBER Working Papers 22255, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22255
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    As found on the RePEc Biblio, the curated bibliography for Economics:
    1. > Environmental and Natural Resource Economics > Climate economics > Abatement costs

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    Cited by:

    1. Ma, Chunbo & Hailu, Atakelty & You, Chaoying, 2019. "A critical review of distance function based economic research on China’s marginal abatement cost of carbon dioxide emissions," Energy Economics, Elsevier, vol. 84(C).
    2. Fried, Stephie & Novan, Kevin & Peterman, William B., 2022. "Climate policy transition risk and the macroeconomy," European Economic Review, Elsevier, vol. 147(C).
    3. Legge, Stefan & Schmid, Lukas, 2016. "Media attention and betting markets," European Economic Review, Elsevier, vol. 87(C), pages 304-333.
    4. Kyle C. Meng, 2017. "Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy," American Economic Review, American Economic Association, vol. 107(3), pages 748-784, March.
    5. He, Mengxi & Zhang, Yaojie, 2022. "Climate policy uncertainty and the stock return predictability of the oil industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    6. Severen, Christopher & Costello, Christopher & Deschênes, Olivier, 2018. "A Forward-Looking Ricardian Approach: Do land markets capitalize climate change forecasts?," Journal of Environmental Economics and Management, Elsevier, vol. 89(C), pages 235-254.
    7. Lily Hsueh, 2019. "Voluntary climate action and credible regulatory threat: evidence from the carbon disclosure project," Journal of Regulatory Economics, Springer, vol. 56(2), pages 188-225, December.
    8. Schlenker, Wolfram & Taylor, Charles A., 2021. "Market expectations of a warming climate," Journal of Financial Economics, Elsevier, vol. 142(2), pages 627-640.
    9. Thomas Stoerk, 2017. "Compliance, Efficiency and Instrument Choice: Evidence from air pollution control in China," GRI Working Papers 273, Grantham Research Institute on Climate Change and the Environment.
    10. Stephie Fried & Kevin Novan & William B. Peterman, 2021. "The Macro Effects of Climate Policy Uncertainty," Finance and Economics Discussion Series 2021-018, Board of Governors of the Federal Reserve System (U.S.).
    11. Adler, David & Severnini, Edson, 2023. "Timing matters: Intra-day shifts of economic activity and ambient ozone concentrations," Journal of Public Economics, Elsevier, vol. 223(C).
    12. Wolfram Schlenker & Charles A Taylor, 2019. "Market Expectations About Climate Change," NBER Working Papers 25554, National Bureau of Economic Research, Inc.

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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