Climate Policy Design with Correlated Uncertainties in Offset Supply and Abatement Cost
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Brian C. Murray & Richard G. Newell & William A. Pizer, 2009.
"Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade,"
Review of Environmental Economics and Policy,
Association of Environmental and Resource Economists, vol. 3(1), pages 84-103, Winter.
- Brian C. Murray & Richard G. Newell & William A. Pizer, 2008. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," NBER Working Papers 14258, National Bureau of Economic Research, Inc.
- 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.
- Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
- 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.
- Fan, Lin & Hobbs, Benjamin F. & Norman, Catherine S., 2010. "Risk aversion and CO2 regulatory uncertainty in power generation investment: Policy and modeling implications," Journal of Environmental Economics and Management, Elsevier, vol. 60(3), pages 193-208, November.
- Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
- TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
- Thomas Tallarini, "undated". "Risk-Sensitive Real Business Cycles," GSIA Working Papers 1997-35, Carnegie Mellon University, Tepper School of Business.
- Fischer, Carolyn, 2005. "Project-based mechanisms for emissions reductions: balancing trade-offs with baselines," Energy Policy, Elsevier, vol. 33(14), pages 1807-1823, September.
- Fischer, Carolyn, 2004. "Project-Based Mechanisms for Emissions Reductions: Balancing Trade-offs with Baselines," Discussion Papers dp-04-32, Resources For the Future.
- Cronshaw, Mark B & Brown-Kruse, Jamie, 1996. "Regulated Firms in Pollution Permit Markets with Banking," Journal of Regulatory Economics, Springer, vol. 9(2), pages 179-189, March.
- Murray Fulton & James Vercammen, 2009. "Optimal Two-Part Pricing in a Carbon Offset Market: A Comparison of Organizational Types," Southern Economic Journal, Southern Economic Association, vol. 76(2), pages 513-532, October.
- Urvashi Narain & Klaas Veld, 2008. "The Clean Development Mechanism’s Low-hanging Fruit Problem: When Might it Arise, and How Might it be Solved?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 40(3), pages 445-465, July.
- Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
- Pizer, William & Newell, Richard, 1998. "Regulating Stock Externalities Under Uncertainty," Discussion Papers dp-99-10-rev, Resources For the Future.
- Harrison Fell & Richard Morgenstern, 2010. "Alternative Approaches to Cost Containment in a Cap-and-Trade System," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 47(2), pages 275-297, October.
- Fell, Harrison & Morgenstern, Richard, 2009. "Alternative Approaches to Cost Containment in a Cap-and-Trade System," Discussion Papers dp-09-14, Resources For the Future.
- Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-969, July. Full references (including those not matched with items on IDEAS)