Smart Cap

70 Pages Posted: 31 Mar 2021

See all articles by Larry Karp

Larry Karp

University of California, Berkeley

Christian P. Traeger

University of Oslo - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: March 1, 2021

Abstract

We introduce a “smart” cap and trade system that eliminates the welfare costs of asymmetric information (“uncertainty”). This cap responds endogenously to technology or macroeconomic shocks, relying on the market price of certificates to aggregate information. It allows policy makers to modify existing institutions to achieve more efficient emission reductions. The paper also shows that the efficient carbon price is more sensitive to technological innovations than usually assumed. The lasting impact and slow diffusion of these innovations typically make the optimal carbon price a much steeper function of emissions than suggested by the social cost of carbon.

JEL Classification: D80, H20, Q00, Q50

Suggested Citation

Karp, Larry and Traeger, Christian P., Smart Cap (March 1, 2021). CEPR Discussion Paper No. DP15941, Available at SSRN: https://ssrn.com/abstract=3816814

Larry Karp (Contact Author)

University of California, Berkeley

310 Barrows Hall
Berkeley, CA 94720
United States

Christian P. Traeger

University of Oslo - Department of Economics ( email )

Norway

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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