Quantities with Prices
Emissions caps can automatically adjust to preserve the integrity of other policies that lead to emissions reductions.
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.
- 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 as the “Emissions Containment Reserve” in the RGGI trading program.
Dallas Burtraw is a Darius Gaskins senior fellow at RFF. Burtraw’s research includes analysis of the distributional and regional consequences of climate policy and the evolution of electricity markets including renewable integration.
Karen Palmer is a Senior Fellow at Resources for the Future and an expert on the economics of environmental, climate and public utility regulation of the electric power sector. She also serves as the director of the Future of Power Initiative.
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