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Soft and hard price collars in a cap-and-trade system: A comparative analysis

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  • Fell, Harrison
  • Burtraw, Dallas
  • Morgenstern, Richard D.
  • Palmer, Karen L.

Abstract

We use a stochastic dynamic framework to compare price collars (price ceilings and floors) in a cap-and-trade system with uncertainty in the level of baseline emissions and costs. We consider soft collars, which provide limited volume of additional emission allowances (a reserve) at the price ceiling, and hard collars, which provide an unlimited supply of additional allowances, thereby preventing allowance prices from exceeding the price ceiling. Conversely, allowances are removed from the market if prices fall to the floor. We find that increasing the size of the reserve strictly lowers expected net present values of compliance costs; however, there is a diminishing effect as the allowance reserve is expanded. Most of the expected cost savings are achieved with a modest reserve. Consequently, a rather limited soft price collar could provide considerable assurance about cost while preventing the possibility that emissions could spiral out of control.

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Bibliographic Info

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

Volume (Year): 64 (2012)
Issue (Month): 2 ()
Pages: 183-198

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Handle: RePEc:eee:jeeman:v:64:y:2012:i:2:p:183-198

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

Related research

Keywords: Climate change; Cap-and-trade; Price collars; Stochastic dynamic programming;

References

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Citations

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Cited by:
  1. J. Andrew Kelly & Herman R.J. Vollebergh, 2012. "Adaptive Policy Mechanisms for Transboundary Air Pollution Regulation: Reasons and Recommendations," Working Papers, Fondazione Eni Enrico Mattei 2012.32, Fondazione Eni Enrico Mattei.
  2. 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, Center for Economic and Policy Studies 2013-01, Center for Economic and Policy Studies.
  3. Stocking, Andrew, 2012. "Unintended consequences of price controls: An application to allowance markets," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 63(1), pages 120-136.
  4. Hasegawa, Makoto & Salant, Stephen, 2012. "Cap-and-Trade Programs under Delayed Compliance," Discussion Papers, Resources For the Future dp-12-32, Resources For the Future.
  5. Federico Boffa & Stefano Clò & Alessio D'Amato, 2013. "Environmental policy and incentives to adopt abatement technologies under endogenous uncertainty," Working Papers, Department of the Treasury, Ministry of the Economy and of Finance 5, Department of the Treasury, Ministry of the Economy and of Finance.
  6. Carlén, Björn & Hernández, Aday, 2013. "Indexing European carbon taxes to the EU ETS Permit Price: a good idea?," Working papers in Transport Economics, CTS - Centre for Transport Studies Stockholm (KTH and VTI) 2013:33, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
  7. Burtraw, Dallas & Palmer, Karen L., 2013. "Mixing It Up: Power Sector Energy and Regional and Regulatory Climate Policies in the Presence of a Carbon Tax," Discussion Papers, Resources For the Future dp-13-09, Resources For the Future.

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