Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade

31 Pages Posted: 20 Aug 2008

See all articles by Brian C. Murray

Brian C. Murray

Duke University

Richard G. Newell

Duke University - Nicholas School of Environment; National Bureau of Economic Research (NBER); Resources for the Future

William A. Pizer

Duke University

Multiple version iconThere are 2 versions of this paper

Date Written: July 15, 2008

Abstract

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.

Keywords: climate change, regulation, uncertainty, welfare, prices, quantities

JEL Classification: Q54, Q58, L51, D8

Suggested Citation

Murray, Brian C. and Newell, Richard G. and Pizer, William A., Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade (July 15, 2008). RFF Discussion Paper No. 08-24. Available at SSRN: https://ssrn.com/abstract=1238902 or http://dx.doi.org/10.2139/ssrn.1238902

Brian C. Murray

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Richard G. Newell (Contact Author)

Duke University - Nicholas School of Environment ( email )

Box 90228
Durham, NC 27708-0328
United States
919-681-8865 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

William A. Pizer

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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