Environmental and Resource Economics

, Volume 31, Issue 2, pp 133–157 | Cite as

Managing Permit Markets to Stabilize Prices

  • Richard Newell
  • William Pizer
  • Jiangfeng Zhang


The political economy of environmental policy favors the use of quantity-based instruments over price-based instruments (e.g., tradable permits over green taxes), at least in the United States. With cost uncertainty, however, there are clear efficiency advantages to prices in cases where the marginal damages of emissions are relatively flat, such as with greenhouse gases. The question arises, therefore, of whether one can design flexible quantity policies that mimic the behavior of price policies, namely stable permit prices and abatement costs. We explore a number of “quantity-plus” policies that replicate the behavior of a price policy through rules that adjust the effective permit cap for unexpectedly low or high costs. They do so without necessitating any monetary exchanges between the government and the regulated firms, which can be a significant political barrier to the use of price instruments.


banking borrowing prices quantities tradable permit market uncertainty 

JEL classifications

Q28 Q48 D8  L51 


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Copyright information

© Springer 2005

Authors and Affiliations

  • Richard Newell
    • 1
  • William Pizer
    • 1
  • Jiangfeng Zhang
    • 1
  1. 1.Resources for the FutureWashingtonUSA

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