Smart Cap

Christian Traeger and Larry Karp

No 15941, CEPR Discussion Papers from Centre for Economic Policy Research

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 policy makers 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 (search for similar items in EconPapers)
JEL-codes: D80 H20 Q00 Q50 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-cwa, nep-ene and nep-env
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