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Price Containment for Cap-and-Trade

Price Containment for Cap-and-Trade. Camp Resources 6/24/2010 Peter Maniloff* and Brian Murray*^ *Nicholas School of the Environment ^Nicholas Institute for Environmental Policy Solutions. Prices are volatile. Dec 2007 Dec 2008 Dec 2012. Prices from Point Carbon. Strategic Reserve Fund.

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Price Containment for Cap-and-Trade

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  1. Price Containment for Cap-and-Trade Camp Resources 6/24/2010 Peter Maniloff* and Brian Murray*^ *Nicholas School of the Environment ^Nicholas Institute for Environmental Policy Solutions

  2. Prices are volatile Dec 2007 Dec 2008 Dec 2012 Prices from Point Carbon

  3. Strategic Reserve Fund Supply $ Price Cap Reserve fund size Expected Price Expected Demand Pollution (Emissions) Q*

  4. Strategic Reserve Fund Supply $ Price Cap 2 Reserve fund size Realized Demand 1 Pollution (Emissions) Q*

  5. Model reserve price expected price allowance price time

  6. Model • Random walk in prices reserve price allowance price realized price time

  7. Model • Random walk in prices • Constant elasticity of demand reserve price allowance price realized price time

  8. Model • Jump diffusion random walk in prices • Constant elasticity of demand • Parameterization based on simulation models and the EU ETS experience

  9. Model • Jump diffusion random walk in prices • Constant elasticity of demand • Parameterization based on simulation models and the EU ETS experience

  10. Sample price paths

  11. Results

  12. Acknowledgements Thanks to • Nat Keohane and Alexander Golub • Randy Kramer, Lori Bennear, Justin Baker, and participants in the Duke environmental social sciences seminar • Two reviewers • The Nicholas Institute for Environmental Policy Solutions

  13. Next Steps • Further estimation and projection of parameters. This may include an expert elicitation process. • Add a utility framework to model optimal reserve size given price cap.

  14. Review comments • Review comment - Are upward price spikes more likely in early years of the program when banks have not had time to build and downward spikes more common in later years for reverse reason? • Explored: Yes, perhaps, but balances out to have little effect on effective reserve size • Review comment – lots of comments about our parameters. • We are exploring other estimation and projection methods. • We are also considering an expert elicitation process. • Consider a price floor • That is omitted from these results, but does not substantially alter them. Very few runs substantially trigger both a price ceiling and price floor.

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