Working Paper: NBER ID: w17878
Authors: Harrison Fell; Ian A. Mackenzie; William A. Pizer
Abstract: Quantity-based regulation with banking allows regulated firms to shift obligations across time in response to periods of unexpectedly high or low marginal costs. Despite its wide prevalence in existing and proposed emission trading programs, banking has received limited attention in past welfare analyses of policy choice under uncertainty. We address this gap with a model of banking behavior that captures two key constraints: uncertainty about the future from the firm's perspective and a limit on negative bank values (e.g., borrowing). We show conditions where banking provisions reduce price volatility and lower expected costs compared to quantity policies without banking. For plausible parameter values related to U.S. climate change policy, we find that bankable quantities produce behavior quite similar to price policies for about two decades and, during this period, improve welfare by about a $1 billion per year over fixed quantities.
Keywords: banking; emission trading; climate policy; cost uncertainty
JEL Codes: Q52; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Banking provisions (G28) | Reduced price volatility (G13) |
| Banking provisions (G28) | Lower expected costs (D61) |
| Cost shocks (D24) | Price volatility (G13) |
| Banking provisions (G28) | Welfare outcomes (I38) |
| Banking provisions (when constraints are not expected to bind) (G21) | Behavior similar to price policies (L11) |
| Tighter banking constraints (F65) | Reduced ability to match welfare associated with prices (D69) |
| Looser banking constraints (G21) | Enhanced ability to match welfare associated with prices (D69) |
| Bankable quantities (G32) | Improved welfare (I39) |