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Prices versus Quantities versus Bankable Quantities

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Author Info
Fell, Harrison () (Resources for the Future)
MacKenzie, Ian A.
Pizer, William A.

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Abstract

Welfare comparisons of regulatory instruments under uncertainty, even in dynamic analyses, have typically focused on price versus quantity controls despite the presence of banking and borrowing provisions in existing emissions trading programs. This is true even in the presence of banking and borrowing provisions in existing emissions trading programs. Nonetheless, many have argued that such provisions can reduce price volatility and lower costs in the face of uncertainty, despite any theoretical or empirical evidence. This paper develops a model and solves for optimal banking and borrowing behavior with uncertain cost shocks that are serially correlated. We show that while banking does reduce price volatility and lowers costs, the degree of these reductions depends on the persistence of shocks. For plausible parameter values related to U.S. climate change policy, we find that bankable quantities eliminate about 20 percent of the cost difference between price and nonbankable quantities.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-08-32.

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Date of creation: 01 Jul 2008
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Handle: RePEc:rff:dpaper:dp-08-32

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Related research
Keywords: welfare; prices; quantities; climate change;

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Find related papers by JEL classification:
Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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  1. Brian C. Murray & Richard G. Newell & William A. Pizer, 2008. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," NBER Working Papers 14258, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Stuart Mestelman & Andrew Muller, 1997. "Emissions Trading with Shares and Coupons when Control over Discharges is Uncertain," McMaster Experimental Economics Laboratory Publications 1997-01, McMaster University. [Downloadable!]
    Other versions:
  3. Paul Leiby & Jonathan Rubin, 2001. "Intertemporal Permit Trading for the Control of Greenhouse Gas Emissions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 19(3), pages 229-256, July. [Downloadable!] (restricted)
  4. 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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  5. Pizer, William A., 1999. "The optimal choice of climate change policy in the presence of uncertainty," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 255-287, August. [Downloadable!] (restricted)
  6. Schennach, Susanne M., 2000. "The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 189-210, November. [Downloadable!] (restricted)
  7. 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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  8. 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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  9. Feng, Hongli & Zhao, Jinhua, 2006. "Alternative intertemporal permit trading regimes with stochastic abatement costs," Resource and Energy Economics, Elsevier, vol. 28(1), pages 24-40, January. [Downloadable!] (restricted)
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  10. 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)
  11. 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)
  12. 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)
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  14. 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)
  15. Blinder, Alan S & Maccini, Louis J, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter. [Downloadable!] (restricted)
  16. Jacoby, Henry D. & Ellerman, A. Denny, 2004. "The safety valve and climate policy," Energy Policy, Elsevier, vol. 32(4), pages 481-491, March. [Downloadable!] (restricted)
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