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

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Author Info
Brian C. Murray
Richard G. Newell
William A. Pizer

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14258.

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Date of creation: Aug 2008
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Handle: RePEc:nbr:nberwo:14258

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Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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  1. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Kerr, Suzi & Newell, Richard, 2001. "Policy-Induced Technology Adoption: Evidence from the U.S. Lead Phasedown," Discussion Papers dp-01-14, Resources For the Future. [Downloadable!]
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  5. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208. [Downloadable!] (restricted)
  6. Unold, Wolfram & Requate, Till, 2001. "Pollution control by options trading," Economics Letters, Elsevier, vol. 73(3), pages 353-358, December. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
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  8. Kling, Catherine & Rubin, Jonathan, 1997. "Bankable permits for the control of environmental pollution," Journal of Public Economics, Elsevier, vol. 64(1), pages 101-115, April. [Downloadable!] (restricted)
  9. Richard Newell & William Pizer & Jiangfeng Zhang, 2005. "Managing Permit Markets to Stabilize Prices," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 31(2), pages 133-157, 06. [Downloadable!] (restricted)
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  10. Tatsutani, Marika & Pizer, William A., 2008. "Managing Costs in a U.S. Greenhouse Gas Trading Program: A Workshop Summary," Discussion Papers dp-08-23, Resources For the Future. [Downloadable!]
  11. Hoel, Michael & Karp, Larry, 2002. "Taxes versus quotas for a stock pollutant," Resource and Energy Economics, Elsevier, vol. 24(4), pages 367-384, November. [Downloadable!] (restricted)
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  12. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Blackwell Publishing, vol. 41(4), pages 477-91, October. [Downloadable!] (restricted)
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  1. Joseph E. Aldy & Alan J. Krupnick & Richard G. Newell & Ian W.H. Parry & William A. Pizer, 2009. "Designing Climate Mitigation Policy," NBER Working Papers 15022, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Fell, Harrison & MacKenzie, Ian A. & Pizer, William A., 2008. "Prices versus Quantities versus Bankable Quantities," Discussion Papers dp-08-32, Resources For the Future. [Downloadable!]
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