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Mechanisms to Reduce Emissions Uncertaintyunder a Carbon Tax
Marc HafsteadResources for the Future
Roberton C. Williams IIIUniversity of Maryland, Resources for the Future, and NBER
April 17, 2018
Hafstead and Williams (2018) Emissions Certainty Mechanisms
Carbon Taxes and Emissions Uncertainty
In the US, some right-leaning think tanks and parts of thebusiness community have joined the carbon tax coalition
But environmentalist groups are either
hostile to emissions pricingor want assurances emissions targets can me met.
An additional issue for a carbon tax: international agreementsare defined in quantitiesIf we care about emissions levels, why not just implement acap-and-trade?
US federal cap-and-trade is (currently) politically unviable
Some policymakers are considering a hybrid carbon tax policysolution
Hafstead and Williams (2018) Emissions Certainty Mechanisms 1 / 42
Carbon Taxes and Emissions Uncertainty
In the US, some right-leaning think tanks and parts of thebusiness community have joined the carbon tax coalitionBut environmentalist groups are either
hostile to emissions pricingor want assurances emissions targets can me met.
An additional issue for a carbon tax: international agreementsare defined in quantitiesIf we care about emissions levels, why not just implement acap-and-trade?
US federal cap-and-trade is (currently) politically unviable
Some policymakers are considering a hybrid carbon tax policysolution
Hafstead and Williams (2018) Emissions Certainty Mechanisms 1 / 42
Carbon Taxes and Emissions Uncertainty
In the US, some right-leaning think tanks and parts of thebusiness community have joined the carbon tax coalitionBut environmentalist groups are either
hostile to emissions pricing
or want assurances emissions targets can me met.
An additional issue for a carbon tax: international agreementsare defined in quantitiesIf we care about emissions levels, why not just implement acap-and-trade?
US federal cap-and-trade is (currently) politically unviable
Some policymakers are considering a hybrid carbon tax policysolution
Hafstead and Williams (2018) Emissions Certainty Mechanisms 1 / 42
Carbon Taxes and Emissions Uncertainty
In the US, some right-leaning think tanks and parts of thebusiness community have joined the carbon tax coalitionBut environmentalist groups are either
hostile to emissions pricingor want assurances emissions targets can me met.
An additional issue for a carbon tax: international agreementsare defined in quantitiesIf we care about emissions levels, why not just implement acap-and-trade?
US federal cap-and-trade is (currently) politically unviable
Some policymakers are considering a hybrid carbon tax policysolution
Hafstead and Williams (2018) Emissions Certainty Mechanisms 1 / 42
Carbon Taxes and Emissions Uncertainty
In the US, some right-leaning think tanks and parts of thebusiness community have joined the carbon tax coalitionBut environmentalist groups are either
hostile to emissions pricingor want assurances emissions targets can me met.
An additional issue for a carbon tax: international agreementsare defined in quantities
If we care about emissions levels, why not just implement acap-and-trade?
US federal cap-and-trade is (currently) politically unviable
Some policymakers are considering a hybrid carbon tax policysolution
Hafstead and Williams (2018) Emissions Certainty Mechanisms 1 / 42
Carbon Taxes and Emissions Uncertainty
In the US, some right-leaning think tanks and parts of thebusiness community have joined the carbon tax coalitionBut environmentalist groups are either
hostile to emissions pricingor want assurances emissions targets can me met.
An additional issue for a carbon tax: international agreementsare defined in quantitiesIf we care about emissions levels, why not just implement acap-and-trade?
US federal cap-and-trade is (currently) politically unviable
Some policymakers are considering a hybrid carbon tax policysolution
Hafstead and Williams (2018) Emissions Certainty Mechanisms 1 / 42
Carbon Taxes and Emissions Uncertainty
In the US, some right-leaning think tanks and parts of thebusiness community have joined the carbon tax coalitionBut environmentalist groups are either
hostile to emissions pricingor want assurances emissions targets can me met.
An additional issue for a carbon tax: international agreementsare defined in quantitiesIf we care about emissions levels, why not just implement acap-and-trade?
US federal cap-and-trade is (currently) politically unviable
Some policymakers are considering a hybrid carbon tax policysolution
Hafstead and Williams (2018) Emissions Certainty Mechanisms 1 / 42
Carbon Taxes and Emissions Uncertainty
In the US, some right-leaning think tanks and parts of thebusiness community have joined the carbon tax coalitionBut environmentalist groups are either
hostile to emissions pricingor want assurances emissions targets can me met.
An additional issue for a carbon tax: international agreementsare defined in quantitiesIf we care about emissions levels, why not just implement acap-and-trade?
US federal cap-and-trade is (currently) politically unviable
Some policymakers are considering a hybrid carbon tax policysolution
Hafstead and Williams (2018) Emissions Certainty Mechanisms 1 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),
Hybrid policies are more efficient than pure price or quantitySubstantial literature on cap-and-trade hybrid policies
Price Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policies
Metcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) consider
Regulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers
“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policies
Price Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policies
Metcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) consider
Regulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers
“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policies
Price Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policies
Metcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) consider
Regulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers
“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among others
Upward sloping allowance supply curves: Burtraw et al. (2018)Limited literature on carbon tax hybrid policies
Metcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) consider
Regulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers
“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policies
Metcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) consider
Regulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers
“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policies
Metcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) consider
Regulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers
“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policiesMetcalf (2009): The REACT proposal and illustrative modeling
Hafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) consider
Regulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers
“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policiesMetcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) consider
Regulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers
“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policiesMetcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon Fed
Automatic “Tax Adjustment Mechanism”Murray et al. (2017) consider
Regulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers
“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policiesMetcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) consider
Regulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers
“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policiesMetcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) consider
Regulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers
“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policiesMetcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) considerRegulatory Backstop
Dedicated Use of Unanticipated RevenueAldy (2017) considers
“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policiesMetcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) considerRegulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers
“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policiesMetcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) considerRegulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers
“Structured Discretion”Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policiesMetcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) considerRegulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policiesMetcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) considerRegulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers“Structured Discretion”
Harris and Pizer (2018)
Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Hybrid Policy Solutions
Roberts and Spence (1976),Hybrid policies are more efficient than pure price or quantity
Substantial literature on cap-and-trade hybrid policiesPrice Ceilings/Floors: Pizer (2002), Murray, Newell, and Pizer(2002), among othersUpward sloping allowance supply curves: Burtraw et al. (2018)
Limited literature on carbon tax hybrid policiesMetcalf (2009): The REACT proposal and illustrative modelingHafstead et al. (2017) consider
a Carbon FedAutomatic “Tax Adjustment Mechanism”
Murray et al. (2017) considerRegulatory BackstopDedicated Use of Unanticipated Revenue
Aldy (2017) considers“Structured Discretion”
Harris and Pizer (2018)Simulation modeling with “Price Updating in Expectation”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 2 / 42
Key Research Questions
How uncertain are emissions under a carbon tax?What are the drivers of emissions uncertainty?
What are the costs of providing emissions certainty under acarbon tax?
How do the costs vary by mechanism design?What are the trade-offs across different designs?
Hafstead and Williams (2018) Emissions Certainty Mechanisms 3 / 42
Key Research Questions
How uncertain are emissions under a carbon tax?What are the drivers of emissions uncertainty?
What are the costs of providing emissions certainty under acarbon tax?
How do the costs vary by mechanism design?What are the trade-offs across different designs?
Hafstead and Williams (2018) Emissions Certainty Mechanisms 3 / 42
Preview of Results
How uncertain are emissions under a carbon tax?The confidence interval for cumulative emissions is quite large
+/− 24 percent of expected cumulative emissions
Uncertainty in the price elasticity drives emissions uncertaintyWhat are the additional expected costs of providing emissionscertainty under a carbon tax?
Depends on how we define certaintyDepends on key design choices
5 - 80% of primary cost
Hafstead and Williams (2018) Emissions Certainty Mechanisms 4 / 42
Outline
Intro
Emissions Certainty Mechanisms Examples
Reduced-Form Model of Emissions with Uncertainty
Quantifying Emissions Uncertainty
Defining Emissions Certainty
Comparing Tax Adjustment Mechanisms
Hafstead and Williams (2018) Emissions Certainty Mechanisms 5 / 42
Outline
Intro
Emissions Certainty Mechanisms Examples
Reduced-Form Model of Emissions with Uncertainty
Quantifying Emissions Uncertainty
Defining Emissions Certainty
Comparing Tax Adjustment Mechanisms
Hafstead and Williams (2018) Emissions Certainty Mechanisms 5 / 42
Theoretical: REACT example
From Metcalf (2009),
“REACT takes the following approach:
An initial tax and standard growth rate for the tax is set for thefirst year of a control period
Benchmark targets for cumulative emissions are set for thecontrol period. The law could require that the targets be met atannual, five-year, ten-year or some other time interval
If cumulative emissions exceed the target in the given years, thegrowth rate of the tax would rise from its standard growth rate toa higher catch-up rate until cumulative emissions fall below thetarget again”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 6 / 42
Real World: Swiss Carbon Tax on Thermal Fuels
In 2012, the CO2 Ordinance specified “The levy shall be increased asfollows:
from 1 January 2014: at 60 francs per tonne CO2, if the CO2 emissionsfrom thermal fuels in 2012 exceed 79 percent of 1990 emissions;
from 1 January 2016:
at 72 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2014 exceed 76 percent of 1990 emissions,at 84 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2014 exceed 78 percent of 1990 emissions;
from 1 January 2018:
at 96 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2016 exceed 73 percent of 1990 emissions,at 120 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2016 exceed 76 percent of 1990 emissions.”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 7 / 42
Real World: Swiss Carbon Tax on Thermal Fuels
In 2012, the CO2 Ordinance specified “The levy shall be increased asfollows:
from 1 January 2014: at 60 francs per tonne CO2, if the CO2 emissionsfrom thermal fuels in 2012 exceed 79 percent of 1990 emissions;
from 1 January 2016:
at 72 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2014 exceed 76 percent of 1990 emissions,at 84 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2014 exceed 78 percent of 1990 emissions;
from 1 January 2018:
at 96 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2016 exceed 73 percent of 1990 emissions,at 120 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2016 exceed 76 percent of 1990 emissions.”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 7 / 42
Real World: Swiss Carbon Tax on Thermal Fuels
In 2012, the CO2 Ordinance specified “The levy shall be increased asfollows:
from 1 January 2014: at 60 francs per tonne CO2, if the CO2 emissionsfrom thermal fuels in 2012 exceed 79 percent of 1990 emissions;
from 1 January 2016:
at 72 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2014 exceed 76 percent of 1990 emissions,at 84 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2014 exceed 78 percent of 1990 emissions;
from 1 January 2018:
at 96 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2016 exceed 73 percent of 1990 emissions,at 120 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2016 exceed 76 percent of 1990 emissions.”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 7 / 42
Real World: Swiss Carbon Tax on Thermal Fuels
In 2012, the CO2 Ordinance specified “The levy shall be increased asfollows:
from 1 January 2014: at 60 francs per tonne CO2, if the CO2 emissionsfrom thermal fuels in 2012 exceed 79 percent of 1990 emissions;
from 1 January 2016:
at 72 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2014 exceed 76 percent of 1990 emissions,at 84 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2014 exceed 78 percent of 1990 emissions;
from 1 January 2018:
at 96 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2016 exceed 73 percent of 1990 emissions,at 120 francs per tonne CO2 if the CO2 emissions from thermalfuels in 2016 exceed 76 percent of 1990 emissions.”
Hafstead and Williams (2018) Emissions Certainty Mechanisms 7 / 42
Real World: Swiss Carbon Tax on Thermal Fuels
0CHF
20CHF
40CHF
60CHF
80CHF
100CHF
120CHF
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
199019921994199619982000200220042006200820102012201420162018
Carbon
Dioxide
Levy
ThermalCarbo
nDioxideEm
ission
s(ad
justed
)rela;v
eto1990
Year
Hafstead and Williams (2018) Emissions Certainty Mechanisms 8 / 42
Outline
Intro
Emissions Certainty Mechanisms
Reduced-Form Model of Emissions with Uncertainty
Quantifying Emissions Uncertainty
Defining Emissions Certainty
Comparing Tax Adjustment Mechanisms
Hafstead and Williams (2018) Emissions Certainty Mechanisms 9 / 42
Reduced-Form Model
Extension of basic model in Metcalf (2009):Projections of GDP and emissions intensityLog-linear time trend for elasticity; scaling parameter
Yt = (1+ γ)tY0 (1)
logYt − log Yt = ρy(logYt−1 − log Yt−1)+ εyt (2)
log(Et/Yt) = E0/Y0 +β1t+(β2 +β3 log(t)) log(1+Pt/c)+ut (3)
ut = ρuut−1 + ε
ut (4)
Pt = (1+α)t−1P1 + f (Et) (5)
Hafstead and Williams (2018) Emissions Certainty Mechanisms 10 / 42
Reduced-Form Model
Trend Uncertainty
Yt = (1+ γ)tY0 (1)
logYt − log Yt = ρy(logYt−1 − log Yt−1)+ εyt (2)
log(Et/Yt) = E0/Y0 +β1t+(β2 +β3 log(t)) log(1+Pt/c)+ut (3)
ut = ρuut−1 + ε
ut (4)
Pt = (1+α)t−1P1 + f (Et) (5)
Hafstead and Williams (2018) Emissions Certainty Mechanisms 10 / 42
Reduced-Form Model
Trend UncertaintyCyclical Uncertainty
Yt = (1+ γ)tY0 (1)
logYt − log Yt = ρy(logYt−1 − log Yt−1)+ εyt (2)
log(Et/Yt) = E0/Y0 +β1t+(β2 +β3 log(t)) log(1+Pt/c)+ut (3)
ut = ρuut−1 + ε
ut (4)
Pt = (1+α)t−1P1 + f (Et) (5)
Hafstead and Williams (2018) Emissions Certainty Mechanisms 10 / 42
Reduced-Form Model
Trend UncertaintyCyclical UncertaintyPrice Elasticity Uncertainty
Yt = (1+ γ)tY0 (1)
logYt − log Yt = ρy(logYt−1 − log Yt−1)+ εyt (2)
log(Et/Yt) = E0/Y0 +β1t+(β2 +β3 log(t)) log(1+Pt/c)+ut (3)
ut = ρuut−1 + ε
ut (4)
Pt = (1+α)t−1P1 + f (Et) (5)
Hafstead and Williams (2018) Emissions Certainty Mechanisms 10 / 42
Reduced-Form Model: Central-Case Calibration
Trend parameters β1 and γ
EIA AEO 2017 estimates for 2017-2050Price elasticities β2 and β3 and constant term c
Fit long-run elasticity and constant term to steady-state outputfrom E3 CGE modelFit short-run elasticity, holding constant term fixed, to transitionoutput from Goulder-Hafstead E3 CGE model
Hafstead and Williams (2018) Emissions Certainty Mechanisms 11 / 42
Reduced-Form Model: Evaluating Price Elasticity Fit
-9.6
-9.4
-9.2
-9
-8.8
-8.6
-8.4
-8.2
-8
$0 $25 $50 $75 $100$125$150$175$200$225$250$275$300$325$350$375$400$425$450$475
log(Em
ission
sInten
sity)
CarbonPrice
E3 FiDedReduced-Form Non-FiDedReducedForm
Hafstead and Williams (2018) Emissions Certainty Mechanisms 12 / 42
Reduced-Form Model: Evaluating Price Elasticity Fit
0
1
2
3
4
5
2018 2022 2026 2030 2034 2038 2042 2046 2050
Energy-Related
Carbo
nDioxideEm
ission
s(BillionMetric
Ton
s)
Year
E3 Fi?edReduced-Form
Hafstead and Williams (2018) Emissions Certainty Mechanisms 13 / 42
Reduced-Form Model: Calibrating Uncertainty
Trend UncertaintyNormal distributionChoose std. dev. such that confidence interval matches AEOconfidence intervals
Cyclical UncertaintyCalibrate to match historical ()1973-2017) fluctuations
Price Elasticity UncertaintyLog-normal distribution (β2 and β3)Choose std. dev. to generate plausible confidence intervalsAlternatives include: Abrell and Rausch (2017), EMF32, others?
Hafstead and Williams (2018) Emissions Certainty Mechanisms 14 / 42
Outline
Intro
Emissions Certainty Mechanisms
Reduced-Form Model of Emissions with Uncertainty
Quantifying Emissions Uncertainty
Defining Emissions Certainty
Comparing Tax Adjustment Mechanisms
Hafstead and Williams (2018) Emissions Certainty Mechanisms 15 / 42
$0 Carbon Tax Case: Annual US Emissions
0
1
2
3
4
5
6
7
8
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Energy-Related
Carbo
nDioxideEm
ission
s(BillionMetric
Ton
s)
Year
Hafstead and Williams (2018) Emissions Certainty Mechanisms 16 / 42
$0 Carbon Tax Case: Cumulative US Emissions
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
108 116 124 132 140 148 156 164 172 180 188 196 204 212 220
Density
Cumula.veEmissions2017-2050,BillionMetricTons
FullUncertainty TrendUncertainty CyclicalUncertainty
Hafstead and Williams (2018) Emissions Certainty Mechanisms 17 / 42
$44 @ 5% Carbon Tax Case: Annual US Emissions
0
1
2
3
4
5
6
2018 2022 2026 2030 2034 2038 2042 2046 2050
Energy-related
Carbo
nDioxideEm
ission
s(BillionMetric
Ton
s)
Year
Hafstead and Williams (2018) Emissions Certainty Mechanisms 18 / 42
$44 @ 5% Carbon Tax Case: Cumulative US Emissions
0
0.05
0.1
0.15
0.2
0.25
50 58 66 74 82 90 98 106 114 122 130 138 146 154 162
Density
Cumula.veEmissions2017-2050,BillionMetricTons
FullUncertainty TrendUncertainty CyclicalUncertainty Elas.cityUncertainty
Hafstead and Williams (2018) Emissions Certainty Mechanisms 19 / 42
Quantifying Emissions Uncertainty: Summary
Without a carbon taxCyclical variation drives short-term uncertaintyTrends drive long-term uncertainty
With a carbon taxUncertainty in the elasticity of emissions intensity with respect tothe price dominates other sources of uncertainty
Hafstead and Williams (2018) Emissions Certainty Mechanisms 20 / 42
Outline
Intro
Emissions Certainty Mechanisms Examples
Reduced-Form Model of Emissions with Uncertainty
Quantifying Emissions Uncertainty
Defining Emissions Certainty
Comparing Tax Adjustment Mechanisms
Hafstead and Williams (2018) Emissions Certainty Mechanisms 21 / 42
Defining Emissions Certainty
Philosophical Questions
What do the environmentalists want to be certain about?
Should we take into consideration the damage function?
Practical Questions
Annual emissions or cumulative emissions?
What moment(s) of the distribution do we compare?
Hafstead and Williams (2018) Emissions Certainty Mechanisms 22 / 42
Cumulative Emissions Distribution: Examples
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
50 58 66 74 82 90 98 106 114 122 130 138 146 154 162
Dens
ity
Cumulative Emissions 2017-2050, Billion Metric Tons
Hafstead and Williams (2018) Emissions Certainty Mechanisms 23 / 42
Cumulative Emissions Distribution: Examples
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
50 58 66 74 82 90 98 106 114 122 130 138 146 154 162
Dens
ity
Cumulative Emissions 2017-2050, Billion Metric Tons
Hafstead and Williams (2018) Emissions Certainty Mechanisms 23 / 42
Cumulative Emissions Distribution: Examples
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
50 58 66 74 82 90 98 106 114 122 130 138 146 154 162
Dens
ity
Cumulative Emissions 2017-2050, Billion Metric Tons
Hafstead and Williams (2018) Emissions Certainty Mechanisms 23 / 42
Cumulative Emissions Distribution and TAM
Hafstead and Williams (2018) Emissions Certainty Mechanisms 23 / 42
Cumulative Emissions Distribution and TAM
Hafstead and Williams (2018) Emissions Certainty Mechanisms 23 / 42
Defining Emissions Certainty
Philosophical QuestionsWhat do the environmentalists want to be certain about?
Avoid high emissions outcomesShould we take into consideration the damage function?
Yes we should, but we need more info on shape of damage curves
Practical Questions
Annual emissions or cumulative emissions?What moment(s) of the distribution do we compare?
Normalize the 97.5th percentile to be within x% of goal usingsize of adjustmentCompare various moments
Hafstead and Williams (2018) Emissions Certainty Mechanisms 24 / 42
Outline
Intro
Emissions Certainty Mechanisms Examples
Reduced-Form Model of Emissions with Uncertainty
Quantifying Emissions Uncertainty
Defining Emissions Certainty
Comparing Tax Adjustment Mechanisms
Hafstead and Williams (2018) Emissions Certainty Mechanisms 25 / 42
Comparing Tax Adjustment Mechanisms
Alternative mechanism design
Examples of TAM’s in practice
Comparison across mechanisms: A Monte Carlo experiment
Hafstead and Williams (2018) Emissions Certainty Mechanisms 26 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period
Targets and Benchmarks
Types of Adjustments
Frequency and Size of Adjustments
Adjustment Trigger
Hafstead and Williams (2018) Emissions Certainty Mechanisms 27 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050Targets and Benchmarks
Cumulative EmissionsAlternative benchmark paths
Types of Adjustments
DiscreteGrowth rate “penalty”
Frequency and Size of Adjustments
2 or 5 yearsDefine stringency with size of adjustments
Adjustment Trigger
One Sided vs. Two SidedAlternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050
Targets and Benchmarks
Cumulative EmissionsAlternative benchmark paths
Types of Adjustments
DiscreteGrowth rate “penalty”
Frequency and Size of Adjustments
2 or 5 yearsDefine stringency with size of adjustments
Adjustment Trigger
One Sided vs. Two SidedAlternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050Targets and Benchmarks
Cumulative EmissionsAlternative benchmark paths
Types of Adjustments
DiscreteGrowth rate “penalty”
Frequency and Size of Adjustments
2 or 5 yearsDefine stringency with size of adjustments
Adjustment Trigger
One Sided vs. Two SidedAlternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050Targets and Benchmarks
Cumulative Emissions
Alternative benchmark pathsTypes of Adjustments
DiscreteGrowth rate “penalty”
Frequency and Size of Adjustments
2 or 5 yearsDefine stringency with size of adjustments
Adjustment Trigger
One Sided vs. Two SidedAlternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050Targets and Benchmarks
Cumulative EmissionsAlternative benchmark paths
Types of Adjustments
DiscreteGrowth rate “penalty”
Frequency and Size of Adjustments
2 or 5 yearsDefine stringency with size of adjustments
Adjustment Trigger
One Sided vs. Two SidedAlternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050Targets and Benchmarks
Cumulative EmissionsAlternative benchmark paths
Types of Adjustments
DiscreteGrowth rate “penalty”
Frequency and Size of Adjustments
2 or 5 yearsDefine stringency with size of adjustments
Adjustment Trigger
One Sided vs. Two SidedAlternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050Targets and Benchmarks
Cumulative EmissionsAlternative benchmark paths
Types of AdjustmentsDiscrete
Growth rate “penalty”Frequency and Size of Adjustments
2 or 5 yearsDefine stringency with size of adjustments
Adjustment Trigger
One Sided vs. Two SidedAlternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050Targets and Benchmarks
Cumulative EmissionsAlternative benchmark paths
Types of AdjustmentsDiscreteGrowth rate “penalty”
Frequency and Size of Adjustments
2 or 5 yearsDefine stringency with size of adjustments
Adjustment Trigger
One Sided vs. Two SidedAlternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050Targets and Benchmarks
Cumulative EmissionsAlternative benchmark paths
Types of AdjustmentsDiscreteGrowth rate “penalty”
Frequency and Size of Adjustments
2 or 5 yearsDefine stringency with size of adjustments
Adjustment Trigger
One Sided vs. Two SidedAlternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050Targets and Benchmarks
Cumulative EmissionsAlternative benchmark paths
Types of AdjustmentsDiscreteGrowth rate “penalty”
Frequency and Size of Adjustments2 or 5 years
Define stringency with size of adjustmentsAdjustment Trigger
One Sided vs. Two SidedAlternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050Targets and Benchmarks
Cumulative EmissionsAlternative benchmark paths
Types of AdjustmentsDiscreteGrowth rate “penalty”
Frequency and Size of Adjustments2 or 5 yearsDefine stringency with size of adjustments
Adjustment Trigger
One Sided vs. Two SidedAlternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050Targets and Benchmarks
Cumulative EmissionsAlternative benchmark paths
Types of AdjustmentsDiscreteGrowth rate “penalty”
Frequency and Size of Adjustments2 or 5 yearsDefine stringency with size of adjustments
Adjustment Trigger
One Sided vs. Two SidedAlternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050Targets and Benchmarks
Cumulative EmissionsAlternative benchmark paths
Types of AdjustmentsDiscreteGrowth rate “penalty”
Frequency and Size of Adjustments2 or 5 yearsDefine stringency with size of adjustments
Adjustment TriggerOne Sided vs. Two Sided
Alternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Alternative Mechanism Design from Hafstead et al.
Rules vs. Discretion
Control Period 2018-2050Targets and Benchmarks
Cumulative EmissionsAlternative benchmark paths
Types of AdjustmentsDiscreteGrowth rate “penalty”
Frequency and Size of Adjustments2 or 5 yearsDefine stringency with size of adjustments
Adjustment TriggerOne Sided vs. Two SidedAlternative Thresholds
Hafstead and Williams (2018) Emissions Certainty Mechanisms 28 / 42
Example: $44 @ 5% Carbon Tax, No TAM
0
1
2
3
4
5
6
2018 2022 2026 2030 2034 2038 2042 2046 2050
Energy-Related
Carbo
nDioxideEm
ission
s(BillionMetric
Ton
s)
Year
(a) Emissions
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2018 2022 2026 2030 2034 2038 2042 2046 2050
Pricepe
rMetric
Ton
Year
(b) Price
Bad DrawGood Draw
Hafstead and Williams (2018) Emissions Certainty Mechanisms 29 / 42
Example: $44 @ 5% Carbon Tax, TAM
Central case benchmark path (annual emissions), growth rate penalty(5%), 5 years, One-Sided
0
1
2
3
4
5
6
2018 2022 2026 2030 2034 2038 2042 2046 2050
Energy-Related
Carbo
nDioxideEm
ission
s(BillionMetric
Ton
s)
Year
(a) Emissions
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2018 2022 2026 2030 2034 2038 2042 2046 2050
Pricepe
rMetric
Ton
Year
(b) Price
Bad DrawGood Draw
Hafstead and Williams (2018) Emissions Certainty Mechanisms 29 / 42
Example: $44 @ 5% Carbon Tax, TAM
Central case benchmark path (annual emissions), growth rate penalty(5%), 5 years, Two-Sided
0
1
2
3
4
5
6
2018 2022 2026 2030 2034 2038 2042 2046 2050
Energy-Related
Carbo
nDioxideEm
ission
s(BillionMetric
Ton
s)
Year
(a) Emissions
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2018 2022 2026 2030 2034 2038 2042 2046 2050
Pricepe
rMetric
Ton
Year
(b) Price
Bad DrawGood Draw
Hafstead and Williams (2018) Emissions Certainty Mechanisms 29 / 42
Example: $44 @ 5% Carbon Tax, TAM
Straight-line benchmark path (annual emissions), growth rate penalty(5%), 5 years, One-Sided
0
1
2
3
4
5
6
2018 2022 2026 2030 2034 2038 2042 2046 2050
Energy-Related
Carbo
nDioxideEm
ission
s(BillionMetric
Ton
s)
Year
(a) Emissions
$0
$100
$200
$300
$400
$500
$600
2018 2022 2026 2030 2034 2038 2042 2046 2050
Energy-Related
Carbo
nDioxideEm
ission
s(BillionMetric
Ton
s)
Year
(b) Price
Bad DrawGood Draw
Hafstead and Williams (2018) Emissions Certainty Mechanisms 29 / 42
Example: $44 @ 5% Carbon Tax, TAM
Straight-line benchmark path (annual emissions), growth rate penalty(5%), 5 years, Two-Sided
0
1
2
3
4
5
6
2018 2022 2026 2030 2034 2038 2042 2046 2050
Energy-Related
Carbo
nDioxideEm
ission
s(BillionMetric
Ton
s)
Year
(a) Emissions
$0
$100
$200
$300
$400
$500
$600
2018 2022 2026 2030 2034 2038 2042 2046 2050
Energy-Related
Carbo
nDioxideEm
ission
s(BillionMetric
Ton
s)
Year
(b) Price
Bad DrawGood Draw
Hafstead and Williams (2018) Emissions Certainty Mechanisms 29 / 42
Mechanism Comparison
Key questions
How do the additional expected costs vary across mechanisms?
What are the trade-offs across mechanisms?
Do some mechanisms Pareto dominate others?
Hafstead and Williams (2018) Emissions Certainty Mechanisms 30 / 42
Cost vs Emissions (97.5th percentile)
Hafstead and Williams (2018) Emissions Certainty Mechanisms 31 / 42
Cost vs Emissions (mean)
Hafstead and Williams (2018) Emissions Certainty Mechanisms 31 / 42
Cost vs Emissions (target)
Hafstead and Williams (2018) Emissions Certainty Mechanisms 31 / 42
Mechanism Comparison
Key questionsHow do the additional expected costs vary across mechanisms?
ConsiderablyWhat are the trade-offs across mechanisms?
Mechanisms that are more costly at reducing “right-side” riskmay have lower average emissions (or higher probability ofmeeting projected cumulative emissions goal)
Do some mechanisms Pareto dominate others?
Hafstead and Williams (2018) Emissions Certainty Mechanisms 32 / 42
Mechanism Comparison: Details
Alternative benchmark paths
Type of Adjustment
Frequency of Adjustment
One-side vs Two-sided
Hafstead and Williams (2018) Emissions Certainty Mechanisms 33 / 42
Cost vs Emissions (97.5th percentile): Adj. Path
Hafstead and Williams (2018) Emissions Certainty Mechanisms 34 / 42
Cost vs Emissions (mean): Adj. Path
Hafstead and Williams (2018) Emissions Certainty Mechanisms 34 / 42
Cost vs Emissions (target): Adj. Path
Hafstead and Williams (2018) Emissions Certainty Mechanisms 34 / 42
Mechanism Comparison: Details
Alternative benchmark pathsCentral case path Pareto dominates straight-line path
Type of Adjustment
Frequency of Adjustment
One-side vs Two-sided
Hafstead and Williams (2018) Emissions Certainty Mechanisms 35 / 42
Cost vs Emissions (97.5th percentile): Type of Adj.
Hafstead and Williams (2018) Emissions Certainty Mechanisms 36 / 42
Cost vs Emissions (mean): Type of Adj.
Hafstead and Williams (2018) Emissions Certainty Mechanisms 36 / 42
Cost vs Emissions (target): Type of Adj.
Hafstead and Williams (2018) Emissions Certainty Mechanisms 36 / 42
Mechanism Comparison: Details
Alternative benchmark pathsCentral case path Pareto dominates straight-line path
Type of AdjustmentDiscrete adjustments seem to dominate growth rate penalties
Frequency of Adjustment
One-side vs Two-sided
Hafstead and Williams (2018) Emissions Certainty Mechanisms 37 / 42
Cost vs Emissions (97.5th percentile): Frequency
Hafstead and Williams (2018) Emissions Certainty Mechanisms 38 / 42
Cost vs Emissions (mean): Frequency
Hafstead and Williams (2018) Emissions Certainty Mechanisms 38 / 42
Cost vs Emissions (target): Frequency
Hafstead and Williams (2018) Emissions Certainty Mechanisms 38 / 42
Mechanism Comparison: Details
Alternative benchmark pathsCentral case path Pareto dominates straight-line path
Type of AdjustmentDiscrete adjustments seem to Pareto dominate growth ratepenalties
Frequency of AdjustmentMore frequent adjustments are more cost-effective given 97.5percentile targetLess frequent adjustments may lead to lower emissionsUnclear if there is Pareto dominance
One-side vs Two-sided
Hafstead and Williams (2018) Emissions Certainty Mechanisms 39 / 42
Cost vs Emissions (97.5th percentile): One vs. Two Sided
Hafstead and Williams (2018) Emissions Certainty Mechanisms 40 / 42
Cost vs Emissions (mean): One vs Two Sided
Hafstead and Williams (2018) Emissions Certainty Mechanisms 40 / 42
Cost vs Emissions (target): One vs Two Sided
Hafstead and Williams (2018) Emissions Certainty Mechanisms 40 / 42
Mechanism Comparison: Details
Alternative benchmark pathsCentral case path Pareto dominates straight-line path
Type of AdjustmentDiscrete adjustments seem to Pareto dominate growth ratepenalties
Frequency of AdjustmentMore frequent adjustments are more cost-effective given 97.5percentile targetLess frequent adjustments may lead to lower emissionsUnclear if there is Pareto dominance
One-side vs Two-sidedTwo-sided adjustments are far more cost-effective given 97.5percentile targetTwo-sided adjustments are much less likely to hit projectedemissions target
Hafstead and Williams (2018) Emissions Certainty Mechanisms 41 / 42
Conclusion
Using a new reduced-form model, we
quantify emissions uncertainty under a carbon tax
perform a comprehensive quantitative analysis of tax adjustmentmechanisms
We find
emissions uncertainty is potentially large
tax adjustment mechanisms can reduce right-side risk at amoderate expected cost
trade-offs exist across mechanisms
Hafstead and Williams (2018) Emissions Certainty Mechanisms 42 / 42