Working Paper: NBER ID: w20999
Authors: Severin Borenstein; James Bushnell; Frank A. Wolak; Matthew Zaragoza Watkins
Abstract: We study potential equilibria in California's cap-and-trade market for greenhouse gases (GHGs) based on information available before the market started. We find large ex ante uncertainty in business-as-usual emissions and in the abatement that might result from non-market policies, much larger than the reduction that could plausibly occur in response to an allowance price within a politically acceptable range. This implies that the market price is very likely to be determined by an administrative price floor or ceiling. Similar factors seem likely to be present in other cap-and-trade markets for GHGs.
Keywords: cap-and-trade; greenhouse gases; market design; emissions uncertainty
JEL Codes: Q5; Q52; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| large uncertainty in BAU emissions (Q47) | market price of allowances (Q31) |
| uncertainty in BAU emissions (Q47) | extreme price outcomes in the market (D41) |
| complementary policies (J78) | price responsiveness of GHG abatement (Q52) |
| complementary policies (J78) | steepen the abatement supply curve (Q52) |
| high cap set relative to expected emissions (P18) | low probability of market clearing in an interior equilibrium (D52) |
| interplay of uncertainty in BAU emissions and inelasticity of abatement supply (D89) | extreme price outcomes in the market (D41) |