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Unintended consequences of price controls: An application to allowance markets

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  • Stocking, Andrew

Abstract

Price controls established in a cap-and-trade allowance market are intended to reduce cost uncertainty by constraining allowance prices between a ceiling and floor; however, they could provide opportunities for strategic actions by firms that would lower government revenue and increase emissions. In particular, when the ceiling price is supported by introducing new allowances into the market, firms could choose to buy allowances at the ceiling price, regardless of the prevailing market price, in order to lower the equilibrium price of all allowances. Those purchases could either be transacted by firms intending to manipulate the market price or be induced through the introduction of inaccurate information about the cost of emissions abatement. Theory and simulations using allowance elasticity estimates for U.S. firms suggest that the manipulation could be profitable under the stylized setting and assumptions evaluated in the paper, although in practice many other conditions will determine its use.

Suggested Citation

  • Stocking, Andrew, 2012. "Unintended consequences of price controls: An application to allowance markets," Journal of Environmental Economics and Management, Elsevier, vol. 63(1), pages 120-136.
  • Handle: RePEc:eee:jeeman:v:63:y:2012:i:1:p:120-136
    DOI: 10.1016/j.jeem.2011.07.005
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    Citations

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    Cited by:

    1. Shobe, William & Holt, Charles & Huetteman, Thaddeus, 2014. "Elements of emission market design: An experimental analysis of California's market for greenhouse gas allowances," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PA), pages 402-420.
    2. Yu, Jongmin & Mallory, Mindy L., 2015. "An optimal hybrid emission control system in a multiple compliance period model," Resource and Energy Economics, Elsevier, vol. 39(C), pages 16-28.
    3. 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.
    4. Lawrence H. Goulder & Andrew Schein, 2013. "Carbon Taxes vs. Cap and Trade: A Critical Review," NBER Working Papers 19338, National Bureau of Economic Research, Inc.
    5. Holland, Stephen P. & Yates, Andrew J., 2015. "Optimal trading ratios for pollution permit markets," Journal of Public Economics, Elsevier, vol. 125(C), pages 16-27.
    6. Hasegawa, Makoto & Salant, Stephen, 2014. "Cap-and-trade programs under delayed compliance: Consequences of interim injections of permits," Journal of Public Economics, Elsevier, vol. 119(C), pages 24-34.
    7. Peyman Khezr & Ian A. MacKenzie, 2016. "Permit Market Auctions with Allowance Reserves," Discussion Papers Series 553, School of Economics, University of Queensland, Australia.

    More about this item

    Keywords

    Price controls; Carbon; Cap-and-trade; Allowance market; Manipulation; Price ceiling; Elasticity;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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