Bankable Prices

Abstract

Allowing emissions permits to be banked and borrowed over time can yield efficiency gains. I develop a model to demonstrate that banking and borrowing can also be allowed for a price policy. I compare expected welfare between price and quantity policies, with and without banking, under several different scenarios regarding uncertainty. A bankable policy can provide an efficiency improvement by allowing for smoothing of costs, though it does not necessarily dominate a policy that does not allow banking. The ranking of prices vs. quantities and of bankability vs. non-bankability depends on both the slopes of marginal costs and benefits and on the specification of uncertainty.