Journal Article

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

Brian C. Murray, Richard G. Newell and William A. Pizer

in Review of Environmental Economics and Policy

Published on behalf of Association of Environmental and Resource Economists

Volume 3, issue 1, pages 84-103
Published in print January 2009 | ISSN: 1750-6816
Published online January 2009 | e-ISSN: 1750-6824 | DOI: https://dx.doi.org/10.1093/reep/ren016
Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade

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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 article 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: Q54; Q58; L51; D8

Journal Article.  10301 words.  Illustrated.

Subjects: Environmental Economics

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