Working Paper

Quantities with Prices

Mar 21, 2018 | Dallas Burtraw, Charles Holt, Karen L. Palmer, Anthony Paul, William Shobe

Summary

Emissions caps can automatically adjust to preserve the integrity of other policies that lead to emissions reductions.

Key Findings

  • An emissions cap determines the emissions outcome, but the cost of emissions reductions can vary.
  • Other actions by individuals, organizations and jurisdictions could reduce emissions.
  • When emissions caps do not adjust, the actions of individuals have no effect on emissions.
  • We describe a price-responsive supply of emissions allowances that accommodates other policies.
  • This approach has been adopted in the RGGI trading program.

Abstract

Environmental policy with uncertainty is often posed as a choice of price versus quantity instruments. Quantity targets are typically prefered, but paradoxically employ architecture derived from the first-best global framework that applies imperfectly to the partial equilibrium policy setting. In practice, climate policies are incremental and multi-faceted, combining economic and regulatory approaches with limited geographic scope that do not balance global benefits and costs, but nonetheless are envisioned as a noncooperative sequence of actions enabling more efficient and comprehensive global policy. This paper recognizes and evaluates price responsive emissions allowance supply schedules emerging in existing trading programs. We use simulation modeling and laboratory experiments to explore a supply schedule in a regional market. A supply schedule usefully shares the risks and benefits with respect to emissions control costs between economic and environmental interests, preserving the role for technology and energy policies that are expected to lower costs over time.