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Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade

Brian Murray, Richard Newell and William Pizer

No 14258, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: On efficiency grounds, the economics community has to date tended to emphasize price-based policies to address climate change -- such as taxes or a "safety-valve" price ceiling for cap-and-trade -- while environmental advocates have sought a more clear quantitative limit on emissions. This paper presents a simple modification to the idea of a safety valve: a quantitative limit that we call the allowance reserve. Importantly, this idea may bridge the gap between competing interests and potentially improve efficiency relative to tax or other price-based policies. The last point highlights the deficiencies in several previous studies of price and quantity controls for climate change that do not adequately capture the dynamic opportunities within a cap-and-trade system for allowance banking, borrowing, and intertemporal arbitrage in response to unfolding information.

JEL-codes: D8 L51 Q54 Q58 (search for similar items in EconPapers)
Date: 2008-08
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
Note: EEE
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Citations: View citations in EconPapers (30)

Published as Brian C. Murray & Richard G. Newell & William A. Pizer, 2009. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," Review of Environmental Economics and Policy, Oxford University Press for Association of Environmental and Resource Economists, vol. 3(1), pages 84-103, Winter.

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