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Cap-and-Trade Programs under Continual Compliance

Author

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  • Hasegawa, Makoto
  • Salant, Stephen

    (Resources for the Future)

Abstract

Price collars have frequently been advocated to restrict the price of emissions permits. Consequently, collars were incorporated in the three bills languishing in Congress as well as in California?'s AB-32; Europeans are now considering price collars for EU ETS. In advocating collars, most analysts have assumed (1) collars will be implemented by government purchases and sales from bufferstocks, just like bands on foreign exchange rates or commodity prices; and (2) ?firms must surrender permits whenever they pollute. In fact, however, no actual emissions trading scheme has conformed to these assumptions. In the current paper, we maintain the second assumption (continual compliance) and show that while a price collar supported by a supported sufficiently large bufferstock can restrict permit prices, a price collar supported instead by auctions with reserve prices cannot. In a companion paper (Hasegawa and Salant 2012), we show that neither method works once account is taken of delayed compliance.

Suggested Citation

  • Hasegawa, Makoto & Salant, Stephen, 2012. "Cap-and-Trade Programs under Continual Compliance," RFF Working Paper Series dp-12-33, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-12-33
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    File URL: http://www.rff.org/RFF/documents/RFF-DP-12-33.pdf
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    References listed on IDEAS

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    1. Brian C. Murray & Richard G. Newell & William A. Pizer, 2009. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 84-103, Winter.
    2. Wood, Peter John & Jotzo, Frank, 2011. "Price floors for emissions trading," Energy Policy, Elsevier, vol. 39(3), pages 1746-1753, March.
    3. Hasegawa, Makoto & Salant, Stephen, 2012. "Cap-and-Trade Programs under Delayed Compliance," RFF Working Paper Series dp-12-32, Resources for the Future.
    4. Salant, Stephen W, 1983. "The Vulnerability of Price Stabilization Schemes to Speculative Attack," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 1-38, February.
    5. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-648, August.
    6. Harrison Fell & Richard Morgenstern, 2010. "Alternative Approaches to Cost Containment in a Cap-and-Trade System," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 47(2), pages 275-297, October.
    7. Jacoby, Henry D. & Ellerman, A. Denny, 2004. "The safety valve and climate policy," Energy Policy, Elsevier, vol. 32(4), pages 481-491, March.
    8. 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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    Cited by:

    1. Hasegawa, Makoto & Salant, Stephen, 2012. "Cap-and-Trade Programs under Delayed Compliance," RFF Working Paper Series dp-12-32, Resources for the Future.
    2. Hasegawa, Makoto & Salant, Stephen, 2014. "Cap-and-trade programs under delayed compliance: Consequences of interim injections of permits," Journal of Public Economics, Elsevier, vol. 119(C), pages 24-34.

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    More about this item

    Keywords

    emissions trading; marketable permits; price collar; safety valve; price ceiling; price floor;
    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

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