DESIGNING POLLUTION MARKET INSTRUMENTS: CASES OF UNCERTAINTY |
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| Authors: | DALE A CARLSON ANNE M SHOLTZ |
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| Institution: | *Vice President, Corporate Affairs, The Pacific Coast Stock Exchange Incorporated, and Faculty, Division of Humanities and Social Sciences, California Institute of Technology, respectively. This is a revised version of a paper presented at the Western Economic Association International 68th Annual Conference, Lake Tahoe, Nev., July 1993. The authors are grateful for the financial support of The Pacific Stock Exchange Incorporated, The Division of Humanities and Social Sciences at the California Institute of Technology, and the Jet Propulsion Laboratory. They also thank Charles Forman, John Ledyard, Nancy Olmstead, Charles Plott, and David Porter for help in formulating the ideas presented. |
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| Abstract: | This paper examines design alternatives for emissions trading credits and assesses their relative performance given several sources of uncertainty endemic to market-based environmental regulatory programs. Facilities regulated in such programs face significant uncertainty about their total emissions. Uncertainty arises due to changes in production-demand schedules for their product, imperfect knowledge of abatement efficiency, and other informational lags. Depending on the design of the trading credit, this uncertainty can result in significant market price volatility and undesirable increases in peak emissions (in the absence of additional costly market institutions, such as contingent contracts and brokered insurance). In addition to the design alternatives, the paper considers allocation alternatives to alleviate these unintended effects and also discusses the value of properly designed reconciliation markets . |
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