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Prices versus Quantities versus Bankable Quantities

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  • Harrison Fell
  • Ian A. MacKenzie
  • William A. Pizer

Abstract

Quantity-based regulation with banking allows regulated firms to shift obligations across time in response to periods of unexpectedly high or low marginal costs. Despite its wide prevalence in existing and proposed emission trading programs, banking has received limited attention in past welfare analyses of policy choice under uncertainty. We address this gap with a model of banking behavior that captures two key constraints: uncertainty about the future from the firm’s perspective and a limit on negative bank values (e.g., borrowing). We show conditions where banking provisions reduce price volatility and lower expected costs compared to quantity policies without banking. For plausible parameter values related to U.S. climate change policy, we find that bankable quantities produce behavior quite similar to price policies for about two decades and, during this period, improve welfare by about a $1 billion per year over fixed quantities.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17878.

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Date of creation: Mar 2012
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Publication status: published as Fell, Harrison & MacKenzie, Ian A. & Pizer, William A., 2012. "Prices versus quantities versus bankable quantities," Resource and Energy Economics, Elsevier, vol. 34(4), pages 607-623.
Handle: RePEc:nbr:nberwo:17878

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References

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Citations

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Cited by:
  1. Fell, Harrison & Morgenstern, Richard, 2009. "Alternative Approaches to Cost Containment in a Cap-and-Trade System," Discussion Papers dp-09-14, Resources For the Future.
  2. Heutel, Garth, 2011. "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks," Working Papers 11-8, University of North Carolina at Greensboro, Department of Economics.
  3. Nick Hanley & Ian A. MacKenzie, 2009. "The effects of rent seeking over tradable pollution permits," CER-ETH Economics working paper series 09/112, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  4. Samuel Fankhauser & Cameron Hepburn & Jisung Park, 2011. "Combining multiple climate policy instruments: how not to do it," LSE Research Online Documents on Economics 37573, London School of Economics and Political Science, LSE Library.
  5. Rohling, Moritz & Ohndorf, Markus, 2012. "Prices vs. Quantities with fiscal cushioning," Resource and Energy Economics, Elsevier, vol. 34(2), pages 169-187.
  6. Samuel Fankhauser & Cameron Hepburn & Jisung Park, 2011. "Combining multiple climate policy instruments: how not to do it," Grantham Research Institute on Climate Change and the Environment Working Papers 38, Grantham Research Institute on Climate Change and the Environment.
  7. 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.
  8. Webster, Mort & Sue Wing, Ian & Jakobovits, Lisa, 2010. "Second-best instruments for near-term climate policy: Intensity targets vs. the safety valve," Journal of Environmental Economics and Management, Elsevier, vol. 59(3), pages 250-259, May.
  9. Garth Heutel, 2011. "Online Appendix to "How Should Environmental Policy Respond to Business Cycles? Optimal Policy under Persistent Productivity Shocks"," Technical Appendices 10-62, Review of Economic Dynamics.
  10. Benjamin Leard, 2013. "The Welfare Effects of Allowance Banking in Emissions Trading Programs," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 55(2), pages 175-197, June.
  11. Richard G. Newell & William A. Pizer & Daniel Raimi, 2013. "Carbon Markets 15 Years after Kyoto: Lessons Learned, New Challenges," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 123-46, Winter.
  12. Parry, Ian W.H. & Williams, Roberton C., 2011. "Moving U.S. Climate Policy Forward: Are Carbon Taxes the Only Good Alternative?," Discussion Papers dp-11-02, Resources For the Future.

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