by Harrison Fell and Richard D. Morgenstern
- 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. Based on simulation analysis we find that restrictions on banking and borrowing can severely limit the value of the policy. 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.
Fell, H. and R.D. Morgenstern (2009). "Alternative Approaches to Cost Containment in a Cap-and-Trade System." RFF Discussion Paper 09-14, April 2009.
