NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy

Kyle C. Meng

NBER Working Paper No. 22255
Issued in May 2016, Revised in October 2016
NBER Program(s):EEE, PE

This paper develops a method for forecasting the marginal abatement cost (MAC) of climate policy using three features of the failed Waxman-Markey bill. First, the MAC is revealed by the price of traded permits. Second, the permit price is estimated using a regression discontinuity design (RDD) comparing stock returns of firms on either side of the policy’s free permit cutoff rule. Third, because Waxman-Markey was never implemented, I extend the RDD approach to incorporate prediction market prices which normalize estimates by policy realization probabilities. A final bounding analysis recovers a MAC range of $5 to $19 per ton CO2e.

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Document Object Identifier (DOI): 10.3386/w22255

Published: Kyle C. Meng, 2017. "Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy," American Economic Review, vol 107(3), pages 748-784.

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