TY  - JOUR
AU  - Metcalf,Gilbert E.
TI  - Cost Containment in Climate Change Policy: Alternative Approaches to Mitigating Price Volatility
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15125
PY  - 2009
Y2  - July 2009
UR  - http://www.nber.org/papers/w15125
L1  - http://www.nber.org/papers/w15125.pdf
N1  - Author contact info:
Gilbert E. Metcalf
Room 3221
Department of the Treasury
Washington, DC 20220
1500 Pennsylvania Ave., NW
Tel: 202-622-0173
E-Mail: gilbert.metcalf@tufts.edu
AB  - Cap and trade systems are emerging as the front-running policy choice to address climate change concerns in many countries.  One of the apparent attractions of this approach is the ability to achieve hard limits on emissions over a control period.  The cost of achieving this certainty on emission limits is price volatility.  I discuss and evaluate various approaches within cap and trade systems to reduce price volatility.  A fundamental trade-off exists between certainty of emission limits and price volatility.  A pure carbon tax sacrifices certainty of emission limits in favor of price stability.  I discuss how a hybrid carbon tax can be designed to achieve a balance between price stability and emissions certainty.  This hybrid, dubbed the Responsive Emissions Autonomous Carbon Tax (REACT), combines the short-run price stability of a carbon tax with the long-run certainty of emission reductions over a control period.
ER  -