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Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy

Kyle C. Meng

American Economic Review, 2017, vol. 107, issue 3, 748-84

Abstract: This paper develops a method for forecasting the marginal abatement cost (MAC) of climate policy using three features of the failed Waxman-Markey bill. First, the MAC is revealed by the price of traded permits. Second, the permit price is estimated using a regression discontinuity design (RDD) comparing stock returns of firms on either side of the policy's free permit cutoff rule. Third, because Waxman-Markey was never implemented, I extend the RDD approach to incorporate prediction market prices which normalize estimates by policy realization probabilities. A final bounding analysis recovers a MAC range of $5 to $19 per ton CO2e.

JEL-codes: G12 G14 Q52 Q54 Q58 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20150781
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