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  5. Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy

  • Kyle C. Meng
American Economic Review
vol. 107, no. 3, March 2017
(pp. 748–84)
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Abstract

This 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.

Citation

Meng, 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

Additional Materials

JEL Classification

  • 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