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American Economic Review Vol. 109 No. 11 2019

Expecting the Unexpected: Emissions Uncertainty and Environmental Market Design

Severin Borenstein1; James Bushnell2; Frank A. Wolak3; Matthew Zaragoza-Watkins4

1 Haas School of Business, University of California, Berkeley, CA 94720, and National Bureau of Economic Research (email: ) · 2 Department of Economics, University of California, Davis, CA 95616, and National Bureau of Economic Research (email: ) · 3 Department of Economics, Stanford University, Stanford, CA 94305, and National Bureau of Economic Research (email: ) · 4 Department of Economics, Vanderbilt University, Nashville, TN 37235 (email: )

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Abstract

We study potential equilibria in California’s cap-and-trade market for greenhouse gases (GHGs) based on information available before the market started. We find large ex ante uncertainty in business-as-usual emissions and in the abatement that might result from non-market policies, much larger than the reduction that could plausibly occur in response to an allowance price within a politically acceptable range. This implies that the market price is very likely to be determined by an administrative price floor or ceiling. Similar factors seem likely to be present in other cap-and-trade markets for GHGs.

DOI
10.1257/aer.20161218
Volume
109
Issue
11
Pages
3953-3977
Language
en
Sources
crossref bibtex:phds-export.bib openalex

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