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Managing Permit Markets to Stabilize Prices

Author

Listed:
  • Pizer, William

    (Resources for the Future)

  • Newell, Richard

    (Resources for the Future)

  • Zhang, Jiangfeng
Abstract
The political economy of environmental policy favors the use of quantity-based instruments over price-based instruments (e.g., tradable permits over green taxes), at least in the United States. With cost uncertainty, however, there are clear efficiency advantages to prices in many cases, especially for stock pollutants such as greenhouse gases. The question arises, therefore, of whether one can design flexible quantity policies that mimic the behavior of price policies, namely stable permit prices and abatement costs. We explore a number of “quantity-plus” policies that replicate the behavior of a price policy through rules that adjust the effective permit cap for unexpectedly low or high costs. They do so without necessitating any monetary exchanges between the government and the regulated firms, which can be a significant political barrier to the use of price instruments.

Suggested Citation

  • Pizer, William & Newell, Richard & Zhang, Jiangfeng, 2003. "Managing Permit Markets to Stabilize Prices," RFF Working Paper Series dp-03-34, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-03-34
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    File URL: http://www.rff.org/RFF/documents/RFF-DP-03-34.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    permit market; prices; quantities; banking; borrowing; uncertainty;
    All these keywords.

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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