WP-274: Severin Borenstein, James Bushnell, Frank A. Wolak, and Matthew Zaragoza-Watkins, "Expecting the Unexpected: Emissions Uncertainty and Environmental Market Design" (August 2016) | Full Paper
We study potential equilibria in California's 2013-2020 cap-and-trade market for greenhouse gasses (GHGs) based on information available before the market started. We find large ex ante uncertainty in business-as-usual emissions, and in the abatement that might result from non-market policies, compared to the market-based variation than could plausibly result from changes in allowance prices within a politically acceptable price range. This implies that the market price is very likely to be determined by an administrative price floor or ceiling. Comparable analysis seems likely to reach similar conclusions in most cap-and-trade markets for GHGs, consistent with outcomes to date in such markets.
This paper is a substantial revision of sections I through VI of Energy Institute at Haas Working Paper #251, "Report of the Market Simulation Group on Competitive Supply/Demand Balance in the California Allowance Market and the Potential for Market Manipulation", July 2014.