Prices versus Quantities versus Bankable Quantities

28 Pages Posted: 24 Sep 2008 Last revised: 23 Nov 2008

See all articles by Harrison G. Fell

Harrison G. Fell

Resources for the Future

Ian A. MacKenzie

University of Queensland - School of Economics

William A. Pizer

Duke University

Multiple version iconThere are 3 versions of this paper

Date Written: July 1, 2008

Abstract

Welfare comparisons of regulatory instruments under uncertainty have typically focused on price versus quantity controls. This is true even in dynamic analyses of cumulative pollutants and despite the presence of banking and to some extent borrowing provisions in existing emission trading programs. Nonetheless, many have argued that such provisions can reduce price volatility and lower costs in the face of uncertainty. This paper develops a model and solves for optimal banking behavior with baseline emission shocks that are correlated across time. We show that while banking does reduce price volatility and lower costs, the degree of these reductions depends on the persistence of shocks. A large initial bank will also depress price volatility, but optimal behavior will eventually draw down the bank and lead to higher emissions and continued price volatility. For plausible parameter values related to US climate change policy, we find that bankable quantities eliminates perhaps one-fourth of the cost difference between price and non-bankable quantities. We find larger improvements when we extend the model to include expected growth abatement and marginal costs as well as borrowing of permits. This latter result suggests an opportunity for additional welfare-improving policy adjustment.

Keywords: welfare, prices, quantities, climate change

JEL Classification: Q55

Suggested Citation

Fell, Harrison G. and MacKenzie, Ian A. and Pizer, William A., Prices versus Quantities versus Bankable Quantities (July 1, 2008). RFF Discussion Paper No. 08-32-REV. Available at SSRN: https://ssrn.com/abstract=1272661 or http://dx.doi.org/10.2139/ssrn.1272661

Harrison G. Fell (Contact Author)

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States
202-328-5005 (Phone)

Ian A. MacKenzie

University of Queensland - School of Economics ( email )

Brisbane, QLD 4072
Australia

William A. Pizer

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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