We study potential equilibria in California’s 2013-2020 cap-and-trade market for greenhouse gasses (GHGs) based on information available before the market started. We find large ex ante uncertainty in business-as-usual emissions, and in the abatement that might result from non-market policies, compared to the market-based variation that could plausibly result from changes in allowance prices within a politically acceptable range. This implies that the market price is very likely to be determined by an administrative price floor or ceiling. Comparable analysis seems likely to reach similar conclusions in most cap-and-trade markets for GHGs, consistent with outcomes to date in such markets.
Economists favor pricing pollution in part so that consumers face the full social marginal cost (SMC) of goods and services. But even without valuing externalities, retail electricity prices typically exceed private marginal cost, due to a utility’s need to cover average costs. Furthermore, due to costly storage, the marginal cost of electricity can fluctuate widely hour-to-hour, while retail prices do not. We show that residential electricity rates exceed average SMC in most of the US, but there is large variation, both geographically and temporally. This finding has important implications for pass-through of pollution costs, as well as for policies to promote dynamic pricing, alternative energy and reduced electricity consumption.