Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy
American Economic Review · 2017 · Volume 107 · Issue 3
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 CO 2 e.
Keywords
Asset Pricing, Trading volume, Bond Interest Rates, Information and Market Efficiency, Event Studies, Insider Trading, Pollution Control Adoption and Costs, Distributional Effects, Employment Effects, Climate, Natural Disasters and Their Management, Global Warming, Environmental Economics: Government Policy
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