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A Safety Valve for Emissions Trading

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  • John Stranlund

    () (Department of Resource Economics, University of Massachusetts Amherst)

Abstract

This paper considers the optimal design of an emissions trading program that includes a safety valve tax that allows pollution sources to escape the emissions cap imposed by the aggregate supply of emissions permits. I demonstrate that an optimal hybrid emissions trading/emissions tax policy involves a permit supply that is strictly less than under a pure emissions trading scheme and a safety valve tax that exceeds the optimal pure emissions tax as long as expected marginal damage is an increasing function. While the expected level of emissions under a hybrid policy may be more or less than under pure emissions trading or a pure emissions tax, under the assumption that uncertainty about aggregate marginal abatement costs is symmetric the most likely outcome is that emissions will turn out to be less under the hybrid. Finally, a steeper expected marginal damage function calls for higher permit supply and safety valve, which reduces expected aggregate emissions and the probability that the safety valve will be employed.

Suggested Citation

  • John Stranlund, 2009. "A Safety Valve for Emissions Trading," Working Papers 2009-4, University of Massachusetts Amherst, Department of Resource Economics.
  • Handle: RePEc:dre:wpaper:2009-4
    as

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    File URL: http://courses.umass.edu/resec/workingpapers/documents/ResEcWorkingPaper2009-4.pdf
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    Cited by:

    1. Bing Zhang & Yongliang Zhang, 2016. "Policy Conflicts and the Performance of Emissions Trading Markets: An Adaptive Agent-based Analysis," EEPSEA Research Report rr20160339, Economy and Environment Program for Southeast Asia (EEPSEA), revised Mar 2016.
    2. Mirzha de Manuel Armendía, 2011. "Market Efficiency in the EU Emissions Trading Scheme. An outlook for the third trading period," Bruges European Economic Research Papers 20, European Economic Studies Department, College of Europe.

    More about this item

    Keywords

    Emissions Taxes; Emissions Trading; Uncertainty; Safety Valve; Hybrid Emissions Control;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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