Discussion Paper Details

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Title: Smart Cap

Author(s): Larry Karp and Christian Traeger

Publication Date: March 2021

Keyword(s): Asymmetric information, climate change, Integrated assessment, pollution, quantities, Regulation, taxes, technology diffusion and uncertainty

Programme Area(s): Occasional Paper

Abstract: We introduce a "smart" cap and trade system that eliminates the welfare costs of asymmetric information ("uncertainty"). This cap responds endogenously to technology or macroeconomic shocks, relying on the market price of certificates to aggregate information. It allows policy makers to modify existing institutions to achieve more efficient emission reductions. The paper also shows that the efficient carbon price is more sensitive to technological innovations than usually assumed. The lasting impact and slow diffusion of these innovations typically make the optimal carbon price a much steeper function of emissions than suggested by the social cost of carbon.

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Bibliographic Reference

Karp, L and Traeger, C. 2021. 'Smart Cap'. London, Centre for Economic Policy Research.