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Alternative Approaches to Cost Containment in a Cap-and-Trade System

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  • Fell, Harrison

    ()
    (Resources for the Future)

  • Morgenstern, Richard

    ()
    (Resources for the Future)

Abstract

We compare several emissions reduction instruments, including quantity policies with banking and borrowing, price policies, and hybrid policies (safety valve and price collar), using a dynamic model with stochastic baseline emissions. The instruments are compared under the design goal of obtaining the same expected cumulative emissions across all options. Based on simulation analysis with the model parameterized to values relevant to proposed U.S. climate mitigation policies, we find that restrictions on banking and borrowing, including the provision of interest rates on the borrowings, can severely limit the value of the policy, depending on the regulator-chosen allowance issuance path. Although emissions taxes generally provide the lowest expected abatement costs, a cap-and-trade system combined with either a safety valve or a price collar can be designed to provide expected abatement costs near those of a tax, but with lower emissions variance than a tax. Consistently, a price collar is more cost-effective than a safety valve for a given expected cumulative emissions outcome because it encourages inexpensive abatement when abatement costs decline.

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Bibliographic Info

Paper provided by Resources For the Future in its series Discussion Papers with number dp-09-14.

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Date of creation: 13 Apr 2009
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Handle: RePEc:rff:dpaper:dp-09-14

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Keywords: cost containment; safety valve; price collar; climate change;

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References

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  1. 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.
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Citations

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Cited by:
  1. Wood, Peter John & Jotzo, Frank, 2011. "Price floors for emissions trading," Energy Policy, Elsevier, vol. 39(3), pages 1746-1753, March.
  2. Stephen Holland & Andrew J. Yates, 2014. "Optimal Trading Ratios for Pollution Permit Markets," NBER Working Papers 19780, National Bureau of Economic Research, Inc.
  3. Burtraw, Dallas & Palmer, Karen & Kahn, Danny, 2009. "A Symmetric Safety Valve," Discussion Papers dp-09-06, Resources For the Future.
  4. Fell, Harrison & Burtraw, Dallas & Morgenstern, Richard D. & Palmer, Karen L., 2012. "Soft and hard price collars in a cap-and-trade system: A comparative analysis," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 183-198.
  5. Brauneis, Alexander & Mestel, Roland & Palan, Stefan, 2013. "Inducing low-carbon investment in the electric power industry through a price floor for emissions trading," Energy Policy, Elsevier, vol. 53(C), pages 190-204.
  6. Restiani, Phillia & Betz, Regina, 2010. "The Effects of Penalty Design on Market Performance: Experimental Evidence from an Emissions Trading Scheme with Auctioned Permits," Research Reports 107586, Australian National University, Environmental Economics Research Hub.
  7. 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.
  8. Richard G. Newell & William A. Pizer & Daniel Raimi, 2012. "Carbon Markets: Past, Present, and Future," NBER Working Papers 18504, National Bureau of Economic Research, Inc.
  9. Claudia Kettner & Daniela Kletzan-Slamanig & Angela Köppl & Thomas Schinko & Andreas Türk, 2011. "ETCLIP – The Challenge of the European Carbon Market: Emission Trading, Carbon Leakage and Instruments to Stabilise the CO2 Price. Price Volatility in Carbon Markets: Why it Matters and How it Can b," WIFO Working Papers 409, WIFO.
  10. Hasegawa, Makoto & Salant, Stephen, 2012. "Cap-and-Trade Programs under Delayed Compliance," Discussion Papers dp-12-32, Resources For the Future.
  11. Perkis, David F. & Cason, Timothy N. & Tyner, Wallace E., 2012. "An Experimental Investigation of Hard and Soft Price Ceilings in Emissions Permit Markets," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124096, Agricultural and Applied Economics Association.
  12. Andrew Yates, 2012. "On a Fundamental Advantage of Permits Over Taxes for the Control of Pollution," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 51(4), pages 583-598, April.
  13. Stranlund, John K. & Moffitt, L. Joe, 2014. "Enforcement and price controls in emissions trading," Journal of Environmental Economics and Management, Elsevier, vol. 67(1), pages 20-38.
  14. Silvia Albrizio & Helia Costa, 2012. "Policy Uncertainty and Investment in Low-Carbon Technology," Economics Working Papers ECO2012/27, European University Institute.
  15. Hasegawa, Makoto & Salant, Stephen, 2012. "Cap-and-Trade Programs under Continual Compliance," Discussion Papers dp-12-33, Resources For the Future.

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