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

Kyle Meng

No 22255, NBER Working Papers from National Bureau of Economic Research, Inc

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: G14 Q52 Q54 (search for similar items in EconPapers)
Date: 2016-05
New Economics Papers: this item is included in nep-ene and nep-env
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Citations: View citations in EconPapers (4)

Published as Kyle C. Meng, 2017. "Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy," American Economic Review, vol 107(3), pages 748-784.

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Journal Article: Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy (2017)
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