Soft and hard price collars in a cap-and-trade system: A comparative analysis

We use a stochastic dynamic framework to compare price collars (price ceilings and floors) in a cap-and-trade system with uncertainty in the level of baseline emissions and costs. We consider soft collars, which provide limited volume of additional emission allowances (a reserve) at the price ceilin...

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Bibliographic Details
Published in:Journal of environmental economics and management 2012-09, Vol.64 (2), p.183-198
Main Authors: Fell, Harrison, Burtraw, Dallas, Morgenstern, Richard D., Palmer, Karen L.
Format: Article
Language:English
Subjects:
Cap-and-trade
Climate change
Comparative analysis
Cost control
Cost prices
Emissions trading
Environmental economics
Market
Pollution control costs
Price ceilings
Price collars
Price regulations
Stochastic dynamic programming
Studies
Uncertainty
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Summary:We use a stochastic dynamic framework to compare price collars (price ceilings and floors) in a cap-and-trade system with uncertainty in the level of baseline emissions and costs. We consider soft collars, which provide limited volume of additional emission allowances (a reserve) at the price ceiling, and hard collars, which provide an unlimited supply of additional allowances, thereby preventing allowance prices from exceeding the price ceiling. Conversely, allowances are removed from the market if prices fall to the floor. We find that increasing the size of the reserve strictly lowers expected net present values of compliance costs; however, there is a diminishing effect as the allowance reserve is expanded. Most of the expected cost savings are achieved with a modest reserve. Consequently, a rather limited soft price collar could provide considerable assurance about cost while preventing the possibility that emissions could spiral out of control.
ISSN:0095-0696
1096-0449
DOI:10.1016/j.jeem.2011.11.004