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Climate Policy Design with Correlated Uncertainties in Offset Supply and Abatement Cost

  • Harrison Fell
  • Dallas Burtraw
  • Richard Morgenstern
  • Karen Palmer

Emission offsets within cap-and-trade systems are widely believed to contain system costs and stabilize allowance prices. However, trends in offsets supply are uncertain, may be persistent, and may be correlated with other sources of uncertainty. In a dynamic stochastic model we find total costs increase, as does variability in allowance prices and emissions, as uncertainty in offsets becomes more persistent and, to a lesser extent, becomes negatively correlated with uncertainty in abatement costs. These results are amplified with risk sensitivity, larger annual offset limits, and competitive offset purchasing. Imposing an allowance price collar can mitigate cost increases and price variability.

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File URL: http://le.uwpress.org/cgi/reprint/88/3/589
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Article provided by University of Wisconsin Press in its journal Land Economics.

Volume (Year): 88 (2012)
Issue (Month): 3 ()
Pages: 589-611

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Handle: RePEc:uwp:landec:v:88:y:2012:iii:1:p:589-611
Contact details of provider: Web page: http://le.uwpress.org/

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  1. Shaul Ben-David & David Brookshire & Stuart Burness & Michael McKee & Christian Schmidt, 2000. "Attitudes toward Risk and Compliance in Emission Permit Markets," Land Economics, University of Wisconsin Press, vol. 76(4), pages 590-600.
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