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Expecting the Unexpected: Emissions Uncertainty and Environmental Market Design

Severin Borenstein, James Bushnell, Frank A. Wolak, Matthew Zaragoza-Watkins

NBER Working Paper No. 20999
Issued in March 2015, Revised in June 2018
NBER Program(s):Environment and Energy Economics, Industrial Organization

We study potential equilibria in California's cap-and-trade market for greenhouse gases (GHGs) based on information available before the market started. We find large ex ante uncertainty in business-as-usual emissions and in the abatement that might result from non-market policies, much larger than the reduction that could plausibly occur in response to an allowance price within a politically acceptable range. This implies that the market price is very likely to be determined by an administrative price floor or ceiling. Similar factors seem likely to be present in other cap-and-trade markets for GHGs.

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Document Object Identifier (DOI): 10.3386/w20999

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