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• W3149774559 abstract "Price collars have frequently been advocated to restrict the price of emissions permits. Consequently, collars were incorporated in the three bills languishing in Congress as well as in California’s AB-32; Europeans are now considering price collars for EU ETS. In advocating collars, most analysts have assumed (1) collars will be implemented by government purchases and sales from bu¤erstocks, just like bands on foreign exchange rates or commodity prices; and (2) …rms must surrender permits whenever they pollute. In fact, however, no actual emissions trading scheme has conformed to these assumptions. In the current paper, we maintain the second assumption (continual compliance) and show that while a price collar supported by a su¢ ciently large bu¤erstock can restrict permit prices, a price collar supported instead by auctions with reserve prices cannot. In a companion paper (Hasegawa and Salant, 2012), we show that neither method works once account is taken of delayed compliance. Keywords: emissions trading, marketable permits, price collar, safety valve, price ceiling, price ‡oor JEL Classi…cation Numbers: Q54, Q58 We would like to thank Dallas Burtraw, Harrison Fell, Ryan Kellogg, and Andrew Stocking for helpful comments and suggestions and acknowledge the …nancial support provided to Hasegawa by the Nakajima Foundation and the Yamada Academic Research Fund. yDepartment of Economics, University of Michigan. E-mail: makotoh@umich.edu. zDepartment of Economics, University of Michigan, and Resources for the Future. E-mail: ssalant@umich.edu. 1 Introduction Price ceilings, price ‡oors, or “price collars”(a combination of the two) have frequently been advocated to restrict the price of emissions permits. Collars were incorporated in the three bills languishing in Congress as well as in California’s AB-32; Europeans are now considering price collars for EU ETS.1 In advocating collars, virtually all analysts have assumed (1) collars will be implemented by government purchases and sales from bu¤erstocks, just like bands on foreign exchange rates or commodity prices; and (2) …rms must surrender permits continually as they pollute rather than after a delay. There is an extensive literature that supports price collars or one-sided “safety valves” (either a price ceiling or a price ‡oor) on e¢ ciency grounds. Roberts and Spence (1976) demonstrated the expected welfare advantages of a price collar in a one-period model of competitive emissions trading when the regulator is uncertain about abatement costs. Since their model was static, the distinction between delayed and continual compliance did not arise; moreover, they proposed collars implemented by means of …nancial penalties and rewards rather than by bu¤erstock transactions or reserve price auctions. Jacoby and Ellerman (2004) summarize the origins of the safety-valve concept and suggest its possible application in future cap-and-trade programs to limit carbon emissions. Pizer (2002) …nds that introducing a one-sided safety valve into a pure quantity control mechanism leads to signi…cant welfare gains. More recently, Burtraw et al. (2010) and Fell and Morgenstern (2010) examine welfare consequences of introducing two-sided price collars. Burtraw et al. (2010) study a price collar for a cap-and-trade program by simulating a static model. They …nd that a price collar outperforms a one-sided “safety valve.”Fell and Morgenstern (2010) simulate a stochastic dynamic model of a cap-and-trade program and compare several policies to reduce emissions: quantity policies with banking and borrowing, a price policy (an emissions tax), and hybrid policies (safety valve and price collar). However, both Burtraw et al. (2010) and Fell and Morgenstern (2010) assume that the price collar is implemented by a bu¤erstock policy and that this price collar can always be maintained. They also assume that 1For a recent discussion of this issue, see Robert Stavins’s blogpost (www.robertstavinsblog.org) “Low Prices a Problem?” (April 25, 2012). Stavins regards the absence of a safety valve or price collar in the European system as a “design ‡aw.”For a discussion of how a price ‡oor could be introduced into the European system, see David Hone’s blogpost (http://blogs.shell.com/climatechange/2012/06/auction/) “The Case for an Auction Reserve Price” (June 7, 2012) and the references therein. Hone notes that “it is too late for auctions to be held periodically throughout the commitment period for Phase III or the EU ETS (2013-2020) but it could be introduced as part of the expected legislative process to set the parameters for Phase IV (2021 and beyond, probably extending to 2030).”However, most of the literature on which Hones bases his advocacy (1) assumes price collars supported by bu¤erstock policies rather than by auctions with reserve prices and (2) assumes continual compliance rather than delayed compliance. One exception is Grubb. Grubb (2009, 2012) proposes setting a reserve price (‡oor price) on future EU ETS auctions to mitigate downside risks associated with low-carbon investment and to stabilize auction revenues." @default.
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• W3149774559 title "Cap-and-Trade Programs under Continual Compliance" @default.
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