California’s Greenhouse Gas (GHG) cap-and-trade program is a key element of the suite of policies the State has adopted to achieve its climate policy goals. The passage of AB 398 (California Global Warming Solutions Act of 2006: market-based compliance mechanisms) extended the use of the cap-and-trade program for the 2021-2030 period, while also specifying modifications of the program’s “cost containment” structure and directing CARB to “[e]valuate and address concerns related to overallocation in [ARB’s] determination of the allowances available for years 2021 to 2030.” The changes being considered by CARB will not only affect the program’s stringency, but also its performance by affecting the ability of the “cost containment” structure to mitigate allowance price volatility and the risk of suddenly escalating allowance prices.
This paper analyzes the impacts of consumer subsidies in the global market for solar panels. Consumer subsidies can have at least two effects. First, subsidies shift out demand and increase equilibrium quantities, holding production costs fixed. Second, subsidies may encourage firms to innovate to reduce their costs over time. I quantify these impacts by estimating a dynamic structural model of competition among solar panel manufacturers. The model produces two key insights. First, ignoring long-run supply responses can generate biased estimates of the effects of government policy. Without accounting for induced innovation, subsidies increased global solar adoption 49 percent over the period 2010-2015, leading to over \$15 billion in external social benefits. Accounting for induced innovation increases the external benefits by at least 22 percent. Second, decentralized government intervention in a global market is inefficient. A subsidy in one country increases long-run solar adoption elsewhere because it increases investment in innovation by international firms. This spillover underscores the need for international coordination to address climate change.
I study ﬁrm behavior in new markets by examining coal-dependent private electric utili-ties’ beliefs about the sulfur dioxide allowance price following the implementation of the U.S. Acid Rain Program. The program is the ﬁrst large-scale cap-and-trade program, exposing the electric utility industry to a wholly novel market for pollution allowances. I estimate ﬁrms’ beliefs about the allowance price from 1995 to 2003 using a ﬁrm-level dynamic model of allowance trades, coal quality, and emission reduction investment. I ﬁnd that ﬁrms ini-tially underestimate the role of market fundamentals as a driver of allowance prices, but over time their beliefs appear to converge toward the stochastic process of allowance prices. Such beliefs in the ﬁrst ﬁve years of the program cost ﬁrms around 10% of their proﬁts. Beliefs also change the relative eﬃciency of cap-and-trade programs and emission taxes.