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Alternative Approaches to Cost Containment in a Cap-and-Trade System

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  • Fell, Harrison

    (Resources for the Future)

  • Morgenstern, Richard

    (Resources for the Future)

Abstract

We compare several emissions reduction instruments, including quantity policies with banking and borrowing, price policies, and hybrid policies (safety valve and price collar), using a dynamic model with stochastic baseline emissions. The instruments are compared under the design goal of obtaining the same expected cumulative emissions across all options. Based on simulation analysis with the model parameterized to values relevant to proposed U.S. climate mitigation policies, we find that restrictions on banking and borrowing, including the provision of interest rates on the borrowings, can severely limit the value of the policy, depending on the regulator-chosen allowance issuance path. Although emissions taxes generally provide the lowest expected abatement costs, a cap-and-trade system combined with either a safety valve or a price collar can be designed to provide expected abatement costs near those of a tax, but with lower emissions variance than a tax. Consistently, a price collar is more cost-effective than a safety valve for a given expected cumulative emissions outcome because it encourages inexpensive abatement when abatement costs decline.

Suggested Citation

  • Fell, Harrison & Morgenstern, Richard, 2009. "Alternative Approaches to Cost Containment in a Cap-and-Trade System," RFF Working Paper Series dp-09-14, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-09-14
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    More about this item

    Keywords

    cost containment; safety valve; price collar; climate change;
    All these keywords.

    JEL classification:

    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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