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Incentives and prices in an emissions trading scheme with updating

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  • Rosendahl, Knut Einar

Abstract

Emissions trading schemes where allocations are based on updated baseline emissions give firms less incentive to reduce emissions for a given quota (or allowance) price. Nevertheless, according to Böhringer and Lange [On the design of optimal grandfathering schemes for emission allowances, Europ. Econ. Rev. 49 (2005) 2041-2055], such allocation schemes are cost-effective if the system is closed and allocation rules are identical across firms. In this paper, we show that the cost-effective solution may be infeasible if marginal abatement costs grow too fast. Moreover, if a price cap or banking/borrowing is introduced, the abatement profile is no longer the same as in the case with an auction (or lump-sum allocation). In addition, we show that with allocation based on updated emissions, the quota price will always exceed marginal abatement costs, possibly misguiding policy makers and investors about abatement costs. Numerical simulations indicate that the quota price most likely will be several times higher than marginal abatement costs, unless a significant share of allowances is auctioned.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 56 (2008)
Issue (Month): 1 (July)
Pages: 69-82

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Handle: RePEc:eee:jeeman:v:56:y:2008:i:1:p:69-82

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Web page: http://www.elsevier.com/locate/inca/622870

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Citations

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Cited by:
  1. Knut Einar Rosendahl & Jon Strand, 2014. "Emissions Trading with Offset Markets and Free Quota Allocations," CESifo Working Paper Series 4603, CESifo Group Munich.
  2. Joseph E. Aldy & Alan J. Krupnick & Richard G. Newell & Ian W.H. Parry & William A. Pizer, 2009. "Designing Climate Mitigation Policy," NBER Working Papers 15022, National Bureau of Economic Research, Inc.
  3. Christoph Böhringer & Knut Einar Rosendahl, 2008. "Strategic Partitioning of Emissions Allowances. Under the EU Emission Trading Scheme," Discussion Papers 538, Research Department of Statistics Norway.
  4. Chung, Sung H. & Weaver, Robert D. & Friesz, Terry L., 2012. "Oligopolies in pollution permit markets: A dynamic game approach," International Journal of Production Economics, Elsevier, vol. 140(1), pages 48-56.
  5. Paul, Anthony & Burtraw, Dallas & Palmer, Karen, 2008. "Compensation for Electricity Consumers Under a U.S. CO2 Emissions Cap," Discussion Papers dp-08-25, Resources For the Future.
  6. Huang, Wei Ming & Lee, Grace W.M., 2009. "GHG legislation: Lessons from Taiwan," Energy Policy, Elsevier, vol. 37(7), pages 2696-2707, July.
  7. Knut Rosendahl & Halvor Storrøsten, 2011. "Emissions Trading with Updated Allocation: Effects on Entry/Exit and Distribution," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 49(2), pages 243-261, June.
  8. Knut Einar Rosendahl & Halvor Briseid Storrøsten, 2008. "Emissions trading with updated grandfathering. Entry/exit considerations and distributional effects," Discussion Papers 546, Research Department of Statistics Norway.
  9. Jones, Benjamin & Keen, Michael & Strand, Jon, 2012. "Fiscal implications of climate change," Policy Research Working Paper Series 5956, The World Bank.
  10. Thomas Eichner & Rüdiger Pethig, 2009. "Taxing and trading carbon emissions in the EU: Distributional comparisons of mixed policies," Volkswirtschaftliche Diskussionsbeiträge 135-09, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
  11. Rolf Golombek & Sverre A.C. Kittelsen & Knut Einar Rosendahl, 2011. "Price and welfare effects of emission quota allocation," Discussion Papers 661, Research Department of Statistics Norway.
  12. Harstad, Bård & Eskeland, Gunnar S., 2010. "Trading for the Future: Signaling in Permit Markets," Discussion Papers 2010/2, Department of Business and Management Science, Norwegian School of Economics.
  13. Anping Chen & Nicolaas Groenewold, 2012. "The Regional Economic Effects of a Reduction in Carbon Emissions and An Evaluation of Offsetting Policies in China," Economics Discussion / Working Papers 12-14, The University of Western Australia, Department of Economics.
  14. Tatsuyoshi Miyakoshi & Laixun Zhao, 2012. "Measuring Households' Vulnerability to Idiosyncratic and Covariate Shocks – the case of Bangladesh," Discussion Paper Series DP2012-19, Research Institute for Economics & Business Administration, Kobe University.
  15. Anping Chen & Nicolaas Groenewold, 2013. "Regional Effects in China of an Emissions-Reduction Policy: Tax v. Subsidy," ERSA conference papers ersa13p1275, European Regional Science Association.

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