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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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  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.
  4. Burtraw, Dallas & Palmer, Karen & Kahn, Danny, 2009. "A Symmetric Safety Valve," Discussion Papers dp-09-06, Resources For the Future.
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  12. Matti Liski & Juan-Pablo Montero, 2006. "On Pollution Permit Banking and Market Power," Journal of Regulatory Economics, Springer, vol. 29(3), pages 283-302, 05.
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Citations

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Cited by:
  1. Burtraw, Dallas & Palmer, Karen & Kahn, Danny, 2010. "A symmetric safety valve," Energy Policy, Elsevier, vol. 38(9), pages 4921-4932, September.
  2. Wood, Peter John & Jotzo, Frank, 2009. "Price Floors for Emissions Trading," Research Reports 94885, Australian National University, Environmental Economics Research Hub.
  3. Phillia Restiani & Regina Betz, 2010. "The Effects of Penalty Design on Market Performance: Experimental Evidence from an Emissions Trading Scheme with Auctioned Permits," Environmental Economics Research Hub Research Reports 1087, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
  4. 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.
  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. 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.
  7. Hasegawa, Makoto & Salant, Stephen, 2012. "Cap-and-Trade Programs under Continual Compliance," Discussion Papers dp-12-33, Resources For the Future.
  8. Silvia Albrizio & Helia Costa, 2012. "Policy Uncertainty and Investment in Low-Carbon Technology," Economics Working Papers ECO2012/27, European University Institute.
  9. Hasegawa, Makoto & Salant, Stephen, 2012. "Cap-and-Trade Programs under Delayed Compliance," Discussion Papers dp-12-32, Resources For the Future.
  10. 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.

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