Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade
Brian C. Murray
Richard G. Newell
Duke University - Nicholas School of Environment; National Bureau of Economic Research (NBER); Resources for the Future
William A. Pizer
July 15, 2008
RFF Discussion Paper No. 08-24
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.
Number of Pages in PDF File: 31
Keywords: climate change, regulation, uncertainty, welfare, prices, quantities
JEL Classification: Q54, Q58, L51, D8working papers series
Date posted: August 20, 2008
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