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Unintended consequences of price controls: An application to allowance markets

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  • Stocking, Andrew

Abstract

Price controls established in a cap-and-trade allowance market are intended to reduce cost uncertainty by constraining allowance prices between a ceiling and floor; however, they could provide opportunities for strategic actions by firms that would lower government revenue and increase emissions. In particular, when the ceiling price is supported by introducing new allowances into the market, firms could choose to buy allowances at the ceiling price, regardless of the prevailing market price, in order to lower the equilibrium price of all allowances. Those purchases could either be transacted by firms intending to manipulate the market price or be induced through the introduction of inaccurate information about the cost of emissions abatement. Theory and simulations using allowance elasticity estimates for U.S. firms suggest that the manipulation could be profitable under the stylized setting and assumptions evaluated in the paper, although in practice many other conditions will determine its use.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 63 (2012)
Issue (Month): 1 ()
Pages: 120-136

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Handle: RePEc:eee:jeeman:v:63:y:2012:i:1:p:120-136

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Web page: http://www.elsevier.com/locate/inca/622870

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Keywords: Price controls; Carbon; Cap-and-trade; Allowance market; Manipulation; Price ceiling; Elasticity;

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References

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Cited by:
  1. Lawrence H. Goulder & Andrew Schein, 2013. "Carbon Taxes vs. Cap and Trade: A Critical Review," NBER Working Papers 19338, National Bureau of Economic Research, Inc.
  2. Stephen Holland & Andrew J. Yates, 2014. "Optimal Trading Ratios for Pollution Permit Markets," NBER Working Papers 19780, National Bureau of Economic Research, Inc.
  3. Charles A. Holt & William M. Shobe, 2013. "Banking and price containment in the California greenhouse gas emissions market: an experimental analysis of market design," Working Papers 2013-01, Center for Economic and Policy Studies.
  4. Fell, Harrison & Burtraw, Dallas & Morgenstern, Richard D. & Palmer, Karen L., 2012. "Soft and hard price collars in a cap-and-trade system: A comparative analysis," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 183-198.

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