Department of Economics

Faculty of Arts and Social Sciences


Seminar - Upcoming

2013 Asia Summer Institute in Behavioral Economics
Asian Meeting of the Econometric Society 2013
Past Events

Department Seminar


Expecting the Unexpected: Emissions Uncertainty and Environmental Market Design


James Bushnell
University of California, Davis

Date: Sep 03, Thu

Time: 4 - 5:30 pm

Venue: Lim Tay Boh Seminar Room (AS2 03-12)
National University of Singapore
1 Arts Link, Singapore 117570

Chair: Alberto Salvo


Existing climate policies have not been very successful in creating a stable and predictable price of carbon, particularly those that use a cap-and-trade mechanism. In this paper, we argue that there are two reasons for this outcome in cap-and-trade markets. The first is the well-known exogenous volatility of GHG emissions themselves. The second reason is more subtle, but may be equally important. Market design features that make the cap-and-trade climate policy politically viable, also steepen the supply curve of abatement and therefore increase the uncertainty in allowance prices for a given amount of exogeneous volatility in GHG emissions.

We analyze the demand for emissions allowances and the supply of allowances and abatement opportunities in California's 2013-2020 cap and trade market for greenhouse gases (GHG). We show that there is significant uncertainty in the business-as-usual (BAU) emissions levels due to uncertainty in economic growth and other factors. Our analysis also suggests that while many GHG abatement programs are in place, most of the planned abatement will not be very sensitive to the price of allowances, creating a steep abatement supply curve. The combination of BAU uncertainty and inelastic abatement supply implies a high probability that the price in the California will either be at the price floor, or high enough to trigger a safety valve mechanism called the Allowance Price Containment Reserve (APCR).