Prices Versus Quantities Versus Bankable Quantities
Ian A. MacKenzie
School of Economics, The University of Queensland
Harrison G. Fell
Resources for the Future
William A. Pizer
Quantity-based regulation with banking allows regulated firms to shift obligations across time in response to periods of unexpectedly high or low marginal costs. Despite its wide prevalance in existing and proposed emission trading programs, banking has received limited attention in past welfare analyses of policy choice under uncertainty. We address this gap with a model of banking behavior that captures two key constraints: uncertainty about the future from the firm’s perspective and a limit on negative bank values (e.g., borrowing). We show conditions where banking provisions reduce price volatility and lower expected costs compared to quantity policies without banking. For plausible parameter values related to U.S. climate change policy, we find that bankable quantities produce behavior quite similar to price policies for about two decades and, during this period, improve welfare by about a $1 billion per year over fixed quantities.
Number of Pages in PDF File: 38
Keywords: prices, quantities, climate change, allowance bankingworking papers series
Date posted: March 28, 2012
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