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Managing Permit Markets to Stabilize Prices

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  • Richard Newell

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  • William Pizer
  • Jiangfeng Zhang

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 cases where the marginal damages of emissions are relatively flat, such as with 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. Copyright Springer 2005

Suggested Citation

  • Richard Newell & William Pizer & Jiangfeng Zhang, 2005. "Managing Permit Markets to Stabilize Prices," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 31(2), pages 133-157, June.
  • Handle: RePEc:kap:enreec:v:31:y:2005:i:2:p:133-157 DOI: 10.1007/s10640-005-1761-y
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    References listed on IDEAS

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    1. Paul Leiby & Jonathan Rubin, 2001. "Intertemporal Permit Trading for the Control of Greenhouse Gas Emissions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 19(3), pages 229-256, July.
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    More about this item

    Keywords

    banking; borrowing; prices; quantities; tradable permit market; uncertainty; Q28; Q48; D8 ; L51;

    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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