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Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade

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Listed:
  • Murray, Brian C.
  • Newell, Richard G.
  • Pizer, William A.

Abstract

On efficiency grounds, the economics community has to date tended to emphasize price-based policies to address climate change -- such as taxes or a “safety-valve” price ceiling for cap-and-trade -— while environmental advocates have sought a more clear quantitative limit on emissions. This paper presents a simple modification to the idea of a safety valve -- a quantitative limit that we call the allowance reserve. Importantly, this idea may bridge the gap between competing interests and potentially improve efficiency relative to tax or other price-based policies. The last point highlights the deficiencies in several previous studies of price and quantity controls for climate change that do not adequately capture the dynamic opportunities within a cap-and-trade system for allowance banking, borrowing, and intertemporal arbitrage in response to unfolding information.

Suggested Citation

  • Murray, Brian C. & Newell, Richard G. & Pizer, William A., 2008. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," RFF Working Paper Series dp-08-24, Resources for the Future.
  • Handle: RePEc:rff:dpaper:dp-08-24
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    References listed on IDEAS

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    1. Kolstad, Charles D., 1996. "Learning and Stock Effects in Environmental Regulation: The Case of Greenhouse Gas Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 1-18, July.
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    6. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
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    9. Tatsutani, Marika & Pizer, William A., 2008. "Managing Costs in a U.S. Greenhouse Gas Trading Program: A Workshop Summary," RFF Working Paper Series dp-08-23, Resources for the Future.
    10. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
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    More about this item

    Keywords

    climate change; regulation; uncertainty; welfare; prices; quantities;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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