Combining Price and Quantity Controls Under Partitioned Environmental Regulation

Abstract

Change combines cutting-edge scientific research with independent policy analysis to provide a solid foundation for the public and private decisions needed to mitigate and adapt to unavoidable global environmental changes. Being data-driven, the Joint Program uses extensive Earth system and economic data and models to produce quantitative analysis and predictions of the risks of climate change and the challenges of limiting human influence on the environmentessential knowledge for the international dialogue toward a global response to climate change.To this end, the Joint Program brings together an interdisciplinary group from two established MIT research centers: the Center for Global Change Science (CGCS) and the Center for Energy and Environmental Policy Research (CEEPR). These two centers-along with collaborators from the Marine Biology Laboratory (MBL) at Woods Hole and short-and long-term visitors-provide the united vision needed to solve global challenges.At the heart of much of the program's work lies MIT's Integrated Global System Model. Through this integrated model, the program seeks to discover new interactions among natural and human climate system components; objectively assess uncertainty in economic and climate projections; critically and quantitatively analyze environmental management and policy proposals; understand complex connections among the many forces that will shape our future; and improve methods to model, monitor and verify greenhouse gas emissions and climatic impacts.This reprint is intended to communicate research results and improve public understanding of global environment and energy challenges, thereby contributing to informed debate about climate change and the economic and social implications of policy alternatives. Abstract: This paper analyzes hybrid emissions trading systems (ETS) under partitioned environmental regulation when firms' abatement costs and future emissions are uncertain. We show that hybrid policies that introduce bounds on the price or the quantity of abatement provide a way to hedge against differences in marginal abatement costs across partitions. Price bounds are more efficient than abatement bounds as they also use information on firms' abatement technologies while abatement bounds can only address emissions uncertainty. Using a numerical stochastic optimization model with equilibrium constraints for the European carbon market, we find that introducing hybrid policies in EU ETS reduces expected excess abatement costs of achieving targeted emissions reductions under EU climate policy by up to 89 percent. We also find that under partitioned regulation there is a high likelihood for hybrid policies to yield sizeable ex-post cost reductions. -Ronald G. Prinn and John M. Reilly, Joint Program Co-Directors MIT Joint Program on the Science and Policy of Global Change

Pricing Carbon in a Multi-Sector Economy with Social Discounting

“…Our findings have important implications for the design of emissions trading systems (ETSs): a single, comprehensive ETS is not optimal when private and social discount rates differ and sectoral production technologies differ. This runs counter to the established policy recommendation to broaden the scope of an ETS or integrate the carbon markets of separate ETSs (Böhringer, Hoffmann and de Lara-Peñate, 2006;Abrell and Rausch, 2017). We show that when CO 2 emissions are regulated by two ETSs within a jurisdiction, price differences between the systems need not be costly.…”

The effect of carbon pricing on technological change for full energy decarbonization: A review of empirical ex‐post evidence

“…Others have advocated cap‐and‐trade systems, highlighting their better dynamic performance (Keohane, 2009; Krysiak, 2008; Storrøsten, 2014; Weber & Neuhoff, 2010). Some find that the two instruments are functionally equivalent (Aldy, Krupnick, Newell, Parry, & Pizer, 2010), while yet others have proposed and analyzed hybrid approaches (Abrell & Rausch, 2017; Pizer, 2002). Within each of these options, there are numerous different ways to design the pricing scheme, each with its own implications and advantages (Carl & Fedor, 2016).…”

Emissions trading with rolling horizons

“…inflexible) supply schedules and typically takes the form of a price corridor, i.e. a combination of a price floor and ceiling, seeGrüll & Taschini (2011), Fell et al (2012 andAbrell & Rausch (2017) inter alia.…”