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Managing Permit Markets to Stabilize Prices

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Author Info
Pizer, William () (Resources for the Future)
Newell, Richard () (Resources for the Future)
Zhang, Jiangfeng

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Abstract

The political economy of environmental policy favors the use of quantity-based instruments over price-based instruments (e.g., tradable permits over green taxes), at least in the United States. With cost uncertainty, however, there are clear efficiency advantages to prices in many cases, especially for stock pollutants such as greenhouse gases. The question arises, therefore, of whether one can design flexible quantity policies that mimic the behavior of price policies, namely stable permit prices and abatement costs. We explore a number of “quantity-plus” policies that replicate the behavior of a price policy through rules that adjust the effective permit cap for unexpectedly low or high costs. They do so without necessitating any monetary exchanges between the government and the regulated firms, which can be a significant political barrier to the use of price instruments.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-03-34.

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Date of creation: 01 Jun 2003
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Handle: RePEc:rff:dpaper:dp-03-34

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Related research
Keywords: permit market; prices; quantities; banking; borrowing; uncertainty;

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Find related papers by JEL classification:
Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Roberton Williams, 2002. "Prices vs. Quantities vs. Tradable Quantities," NBER Working Papers 9283, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Daniel Phaneuf & Till Requate, 2002. "Incentives for Investment in Advanced Pollution Abatement Technology in Emission Permit Markets with Banking," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 22(3), pages 369-390, July. [Downloadable!] (restricted)
  3. Rubin Jonathan & Kling Catherine, 1993. "An Emission Saved Is an Emission Earned: An Empirical Study of Emission Banking for Light-Duty Vehicle Manufacturers," Journal of Environmental Economics and Management, Elsevier, vol. 25(3), pages 257-274, November. [Downloadable!] (restricted)
  4. 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)
  5. Yates, Andrew J. & Cronshaw, Mark B., 2001. "Pollution Permit Markets with Intertemporal Trading and Asymmetric Information," Journal of Environmental Economics and Management, Elsevier, vol. 42(1), pages 104-118, July. [Downloadable!] (restricted)
  6. 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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  7. 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)
  8. Hoel, Michael & Karp, Larry, 2001. "Taxes and quotas for a stock pollutant with multiplicative uncertainty," Journal of Public Economics, Elsevier, vol. 82(1), pages 91-114, October. [Downloadable!] (restricted)
    Other versions:
  9. Warwick J. McKibbin & Martin T. Ross & Robert Shackleton & Peter J. Wilcoxen, 1999. "Emissions Trading, Capital Flows and the Kyoto Protocol," Economics and Environment Network Working Papers 9901, Australian National University, Economics and Environment Network. [Downloadable!]
    Other versions:
  10. Cronshaw, Mark B & Brown-Kruse, Jamie, 1996. "Regulated Firms in Pollution Permit Markets with Banking," Journal of Regulatory Economics, Springer, vol. 9(2), pages 179-89, March.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stavins, Robert, 2003. "Market-Based Environmental Policies: What Can We Learn from U.S. Experience (and Related Research)?," Discussion Papers dp-03-43, Resources For the Future. [Downloadable!]
    Other versions:
  2. Walls, Margaret & McConnell, Virginia & Kopits, Elizabeth, 2003. "How Well Can Markets for Development Rights Work? Evaluating a Farmland Preservation Program," Discussion Papers dp-03-08, Resources For the Future. [Downloadable!]
  3. Murray, Brian C. & Newell, Richard G. & Pizer, William A., 2008. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," Discussion Papers dp-08-24, Resources For the Future. [Downloadable!]
    Other versions:
  4. Frank Krysiak, 2008. "Ex-post efficient permit markets: a detailed analysis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 39(4), pages 397-410, April. [Downloadable!] (restricted)
  5. Julien Pierre Chevallier, 2007. "A differential game of intertemporal emissions trading with market power," EconomiX Working Papers 2007-18, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
  6. Carlo Carraro & Valentina Bosetti & Emanuele Massetti, 2008. "Banking Permits: Economic Efficiency and Distributional Effects," Working Papers 2008_01, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
    Other versions:
  7. Bryan K. Mignone, 2008. "Prices In Emissions Permit Markets: The Role Of Investor Foresight And Capital Durability," CAMA Working Papers 2008-31, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
  8. Julien Chevallier, 2009. "Intertemporal Emissions Trading and Allocation Rules: Gainers, Losers and the Spectre of Market Power," Working Papers halshs-00124713_v1, HAL. [Downloadable!]
  9. 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!]
  10. Pizer, William A., 2006. "Economics versus Climate Change," Discussion Papers dp-06-04, Resources For the Future. [Downloadable!]
  11. Pizer, William, 2005. "Climate Policy Design Under Uncertainty," Discussion Papers dp-05-44, Resources For the Future. [Downloadable!]
  12. Julien Chevallier, 2009. "Intertemporal Emissions Trading and Market Power: A Dominant Firm with Competitive Fringe Model," Working Papers halshs-00388207_v1, HAL. [Downloadable!]
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