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Expecting the Unexpected: Emissions Uncertainty and Environmental Market Design

Author

Listed:
  • Severin Borenstein
  • James Bushnell
  • Frank A. Wolak
  • Matthew Zaragoza-Watkins

Abstract

We study potential equilibria in California's cap-and-trade market for greenhouse gases (GHGs) based on information available before the market started. We find large ex ante uncertainty in business-as-usual emissions and in the abatement that might result from non-market policies, much larger than the reduction that could plausibly occur in response to an allowance price within a politically acceptable range. This implies that the market price is very likely to be determined by an administrative price floor or ceiling. Similar factors seem likely to be present in other cap-and-trade markets for GHGs.

Suggested Citation

  • Severin Borenstein & James Bushnell & Frank A. Wolak & Matthew Zaragoza-Watkins, 2015. "Expecting the Unexpected: Emissions Uncertainty and Environmental Market Design," NBER Working Papers 20999, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20999
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    References listed on IDEAS

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    1. Marion, Justin & Muehlegger, Erich, 2011. "Fuel tax incidence and supply conditions," Journal of Public Economics, Elsevier, vol. 95(9-10), pages 1202-1212, October.
    2. Matthew S. Lewis, 2011. "Asymmetric Price Adjustment and Consumer Search: An Examination of the Retail Gasoline Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 409-449, June.
    3. Jonathan E. Hughes & Christopher R. Knittel & Daniel Sperling, 2008. "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand," The Energy Journal, International Association for Energy Economics, vol. 29(1), pages 113-134.
    4. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, vol. 104(2), pages 537-563, February.
    5. Severin Borenstein & A. Colin Cameron & Richard Gilbert, 1997. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 305-339.
    6. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
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    Citations

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    Cited by:

    1. Abrell, Jan & Rausch, Sebastian, 2017. "Combining price and quantity controls under partitioned environmental regulation," Journal of Public Economics, Elsevier, vol. 145(C), pages 226-242.
    2. Simon Quemin, 2016. "Intertemporal abatement decisions under ambiguity aversion in a cap and trade," Working Papers 1604, Chaire Economie du climat.
    3. repec:eee:eneeco:v:68:y:2017:i:s1:p:57-65 is not listed on IDEAS
    4. Sascha Kollenberg & Luca Taschini, 2015. "The European Union Emissions Trading System and the Market Stability Reserve: Optimal Dynamic Supply Adjustment," CESifo Working Paper Series 5380, CESifo Group Munich.
    5. Daron Acemoglu & Will Rafey, 2018. "Mirage on the Horizon: Geoengineering and Carbon Taxation Without Commitment," NBER Working Papers 24411, National Bureau of Economic Research, Inc.
    6. Meunier, Guy & Montero, Juan-Pablo & Ponssard, Jean-Pierre, 2017. "Using output-based allocations to manage volatility and leakage in pollution markets," Energy Economics, Elsevier, vol. 68(S1), pages 57-65.

    More about this item

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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