Prices versus Quantities versus Bankable Quantities

Harrison Fell, Ian MacKenzie and William Pizer

RFF Working Paper Series from Resources for the Future

Abstract: Welfare comparisons of regulatory instruments under uncertainty, even in dynamic analyses, have typically focused on price versus quantity controls despite the presence of banking and borrowing provisions in existing emissions trading programs. This is true even in the presence of banking and borrowing provisions in existing emissions trading programs. Nonetheless, many have argued that such provisions can reduce price volatility and lower costs in the face of uncertainty, despite any theoretical or empirical evidence. This paper develops a model and solves for optimal banking and borrowing behavior with uncertain cost shocks that are serially correlated. We show that while banking does reduce price volatility and lowers costs, the degree of these reductions depends on the persistence of shocks. For plausible parameter values related to U.S. climate change policy, we find that bankable quantities eliminate about 20 percent of the cost difference between price and nonbankable quantities.

Keywords: welfare; prices; quantities; climate change (search for similar items in EconPapers)
JEL-codes: Q55 (search for similar items in EconPapers)
Date: 2008-07-01
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Journal Article: Prices versus quantities versus bankable quantities (2012)
Working Paper: Prices versus Quantities versus Bankable Quantities (2012)
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