Cost Containment in Climate Change Policy: Alternative Approaches to Mitigating Price Volatility

Gilbert Metcalf

No 15125, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Cap and trade systems are emerging as the front-running policy choice to address climate change concerns in many countries. One of the apparent attractions of this approach is the ability to achieve hard limits on emissions over a control period. The cost of achieving this certainty on emission limits is price volatility. I discuss and evaluate various approaches within cap and trade systems to reduce price volatility. A fundamental trade-off exists between certainty of emission limits and price volatility. A pure carbon tax sacrifices certainty of emission limits in favor of price stability. I discuss how a hybrid carbon tax can be designed to achieve a balance between price stability and emissions certainty. This hybrid, dubbed the Responsive Emissions Autonomous Carbon Tax (REACT), combines the short-run price stability of a carbon tax with the long-run certainty of emission reductions over a control period.

JEL-codes: H23 Q4 Q54 (search for similar items in EconPapers)
Date: 2009-07
New Economics Papers: this item is included in nep-ene and nep-env
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Published as "Cost Containment in Climate Change Policy: Alternative Approaches to Mitigating Price Volatility," University of Virginia Tax Review , 29:2 (2009): 381 – 405.

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