Balancing cost and emissions certainty: an allowance reserve for cap-and-trade
National Bureau of Economic Research, 2008 - Business & Economics - 28 pages
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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additional allowances adjust allowance banking allowance prices allowance reserve idea allowance supply schedule and-trade annual emissions Appendix Figure arbitrage bank or borrow banking and borrowing cap-and-trade program cap-and-trade system ceiling price climate policy cost uncertainty costs and benefits cumulative cap cumulative emissions economic emissions allowances emissions level emissions limit emissions reductions fifty percent firms future allocations future caps future prices future targets greenhouse gas higher future implemented incentive issue maintain the cumulative marginal benefits marginal costs marginal damage mechanism meet demand near-term Newell number of allowances offset optimal options ordinary allowances period 2 marginal period cap Pizer policymakers potential price and quantity price ceiling price floor price is set price-based policies pure price pure quantity quantity controls rational expectations regulated entities reserve allowances reserve auction revised Roberts and Spence safety valve safety-valve price set in period Subscription Sulfur Dioxide tax-based twenty percent Weitzman year's worth