Working Paper: CEPR ID: DP15941
Authors: Christian Traeger; Larry Karp
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 policymakers 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.
Keywords: pollution; climate change; taxes; quantities; regulation; uncertainty; technology diffusion; asymmetric information; integrated assessment
JEL Codes: Q00; Q50; H20; D80
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| smart cap (C24) | efficiency in emission reductions (D61) |
| technological and macroeconomic shocks (O49) | equilibrium certificate price (D53) |
| equilibrium certificate price (D53) | aggregate emissions levels (E10) |
| innovations (O35) | optimal carbon price response (D40) |
| marginal abatement costs due to technology (Q52) | future emissions (Q47) |
| marginal abatement costs due to technology (Q52) | social cost of carbon (SCC) (H43) |