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Mechanisms to Reduce Emissions Uncertainty under a Carbon Tax

Author

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  • Hafstead, Marc

    (Resources for the Future)

  • Williams III, Roberton C.

    (Resources for the Future)

Abstract
Carbon taxes produce uncertain emissions levels, which can be a particular problem for certain constituencies and when international agreements are based around quantity targets. Many studies examine ways to reduce price uncertainty under cap-and-trade, but very few look at reducing emissions uncertainty under a carbon tax. We build a new reduced-form model of US carbon dioxide emissions (calibrated based on a sophisticated dynamic general equilibrium model), with trend and cyclical uncertainty in both GDP and emissions intensity, and uncertainty in the elasticity of emissions intensity with respect to the carbon price. We then introduce hybrid carbon tax policies that combine an initial price path with automatic tax adjustment mechanisms (TAMs) and evaluate how much these mechanisms can reduce emissions uncertainty. Our results show that the magnitude of the effects on emissions and costs varies widely based on how the TAM is designed.

Suggested Citation

  • Hafstead, Marc & Williams III, Roberton C., 2020. "Mechanisms to Reduce Emissions Uncertainty under a Carbon Tax," RFF Working Paper Series 20-05, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-20-05
    as

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    File URL: https://www.rff.org/documents/2395/WP_20-05_v2.pdf
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    References listed on IDEAS

    as
    1. Wood, Peter John & Jotzo, Frank, 2011. "Price floors for emissions trading," Energy Policy, Elsevier, vol. 39(3), pages 1746-1753, March.
    2. Aldy, Joseph, 2017. "Designing and Updating a US Carbon Tax in an Uncertain World," Working Paper Series rwp17-001, Harvard University, John F. Kennedy School of Government.
    3. Fell, Harrison & Burtraw, Dallas & Morgenstern, Richard D. & Palmer, Karen L., 2012. "Soft and hard price collars in a cap-and-trade system: A comparative analysis," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 183-198.
    4. Grüll, Georg & Taschini, Luca, 2011. "Cap-and-trade properties under different hybrid scheme designs," Journal of Environmental Economics and Management, Elsevier, vol. 61(1), pages 107-118, January.
    5. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
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    7. Brian C. Murray & Richard G. Newell & William A. Pizer, 2009. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 84-103, Winter.
    8. Aldy, Joseph, 2017. "Designing and Updating a US Carbon Tax in an Uncertain World," Working Paper Series rwp17-001, Harvard University, John F. Kennedy School of Government.
    Full references (including those not matched with items on IDEAS)

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