Alternative Approaches to Cost Containment in a Cap-and-Trade System

Harrison Fell and Richard Morgenstern ()

RFF Working Paper Series from Resources for the Future

Abstract: We compare several emissions reduction instruments, including quantity policies with banking and borrowing, price policies, and hybrid policies (safety valve and price collar), using a dynamic model with stochastic baseline emissions. The instruments are compared under the design goal of obtaining the same expected cumulative emissions across all options. Based on simulation analysis with the model parameterized to values relevant to proposed U.S. climate mitigation policies, we find that restrictions on banking and borrowing, including the provision of interest rates on the borrowings, can severely limit the value of the policy, depending on the regulator-chosen allowance issuance path. Although emissions taxes generally provide the lowest expected abatement costs, a cap-and-trade system combined with either a safety valve or a price collar can be designed to provide expected abatement costs near those of a tax, but with lower emissions variance than a tax. Consistently, a price collar is more cost-effective than a safety valve for a given expected cumulative emissions outcome because it encourages inexpensive abatement when abatement costs decline.

Keywords: cost containment; safety valve; price collar; climate change (search for similar items in EconPapers)
JEL-codes: Q55 (search for similar items in EconPapers)
Date: 2009-04-13
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Citations: View citations in EconPapers (55)

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Journal Article: Alternative Approaches to Cost Containment in a Cap-and-Trade System (2010)
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