Working Paper: NBER ID: w14258
Authors: Brian C. Murray; Richard G. Newell; William A. Pizer
Abstract: 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 paper 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: cap-and-trade; allowance reserve; climate policy; emissions control; dynamic efficiency
JEL Codes: D8; L51; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| allowance reserve (H72) | emissions control efficiency (Q52) |
| allowance reserve (H72) | political feasibility (D72) |