Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy
AbstractThis paper develops a method for forecasting the marginal abatement cost (MAC) of climate policy using three features of the failed Waxman-Markey bill. First, the MAC is revealed by the price of traded permits. Second, the permit price is estimated using a regression discontinuity design (RDD) comparing stock returns of firms on either side of the policy's free permit cutoff rule. Third, because Waxman-Markey was never implemented, I extend the RDD approach to incorporate prediction market prices which normalize estimates by policy realization probabilities. A final bounding analysis recovers a MAC range of $5 to $19 per ton CO2e.
CitationMeng, Kyle C. 2017. "Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy." American Economic Review, 107 (3): 748-84. DOI: 10.1257/aer.20150781
- G12 Asset Pricing; Trading volume; Bond Interest Rates
- G14 Information and Market Efficiency; Event Studies; Insider Trading
- Q52 Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
- Q54 Climate; Natural Disasters and Their Management; Global Warming
- Q58 Environmental Economics: Government Policy