Prices versus Quantities versus Bankable Quantities

Duke Environmental and Energy Economics Working Paper Series

38 Pages Posted: 28 Mar 2012 Last revised: 23 Jul 2014

See all articles by Ian A. MacKenzie

Ian A. MacKenzie

University of Queensland - School of Economics

Harrison G. Fell

Resources for the Future

William A. Pizer

Duke University

Multiple version iconThere are 3 versions of this paper

Date Written: March 2012

Abstract

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.

Keywords: prices, quantities, climate change, allowance banking

Suggested Citation

MacKenzie, Ian A. and Fell, Harrison G. and Pizer, William A., Prices versus Quantities versus Bankable Quantities (March 2012). Duke Environmental and Energy Economics Working Paper Series. Available at SSRN: https://ssrn.com/abstract=2029763 or http://dx.doi.org/10.2139/ssrn.2029763

Ian A. MacKenzie (Contact Author)

University of Queensland - School of Economics ( email )

Brisbane, QLD 4072
Australia

Harrison G. Fell

Resources for the Future ( email )

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

William A. Pizer

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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