American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Expecting the Unexpected: Emissions Uncertainty and Environmental Market Design
American Economic Review
vol. 109,
no. 11, November 2019
(pp. 3953–77)
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.Citation
Borenstein, Severin, James Bushnell, Frank A. Wolak, and Matthew Zaragoza-Watkins. 2019. "Expecting the Unexpected: Emissions Uncertainty and Environmental Market Design." American Economic Review, 109 (11): 3953–77. DOI: 10.1257/aer.20161218Additional Materials
JEL Classification
- D47 Market Design
- D81 Criteria for Decision-Making under Risk and Uncertainty
- Q54 Climate; Natural Disasters and Their Management; Global Warming
- Q58 Environmental Economics: Government Policy
- R11 Regional Economic Activity: Growth, Development, Environmental Issues, and Changes