 Dynamic welfare implications of market-based climate policy under demand uncertaintyFelipe Gomez-Trejos Journal of Economic Behavior & Organization, 2025, vol. 238, issue C Abstract: The welfare consequences of price versus quantity-based regulation are known to differ when information about marginal benefits or costs of abatement is imperfect. Does uncertainty about demand for the polluting good also matter for welfare of these two approaches to regulation? Using plant-level survey data and high frequency variation in wholesale electricity demand, I assess the dynamic implications of uncertainty about future demand for the relative welfare consequences of carbon taxes and cap-and-trade regulation. I address this question in the context of the electricity sector where demand risk is particularly salient. I show that the choice between policy instruments depends on how firms and consumers balance unpredictable output volatility (higher with carbon taxes) vs. price volatility (higher with cap-and-trade regulation). Over a wide range of policy-relevant abatement targets, I find carbon taxes outperform cap-and-trade in terms of welfare. Keywords: Regulation; Welfare; Uncertainty; Emissions fee; Permit; Electricity; Energy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:238:y:2025:i:c:s0167268125003099 DOI: 10.1016/j.jebo.2025.107190 Access Statistics for this article Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D. More articles in Journal of Economic Behavior & Organization from Elsevier |
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