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Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade

  • Brian C. Murray
  • Richard G. Newell
  • William A. Pizer

On efficiency grounds, the economics community has to date tended to emphasize price-based policies to address climate change -- such as taxes or a "safety-valve" price ceiling for cap-and-trade -- while environmental advocates have sought a more clear quantitative limit on emissions. This paper presents a simple modification to the idea of a safety valve: a quantitative limit that we call the allowance reserve. Importantly, this idea may bridge the gap between competing interests and potentially improve efficiency relative to tax or other price-based policies. The last point highlights the deficiencies in several previous studies of price and quantity controls for climate change that do not adequately capture the dynamic opportunities within a cap-and-trade system for allowance banking, borrowing, and intertemporal arbitrage in response to unfolding information.

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Article provided by Association of Environmental and Resource Economists in its journal Review of Environmental Economics and Policy.

Volume (Year): 3 (2009)
Issue (Month): 1 (Winter)
Pages: 84-103

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Handle: RePEc:oup:renvpo:v:3:y:2009:i:1:p:84-103
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