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Market design in cap and trade programs: Permit validity and compliance timing

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  • Holland, Stephen P.
  • Moore, Michael R.

Abstract

Cap and trade programs have considerable heterogeneity in permit validity and compliance timing. For example, permits have different validities across time (e.g., banking, borrowing, and seasons) and space (e.g., zonal restrictions), and compliance timing can be annual, in overlapping cycles, or in multi-year periods. We discuss nine prominent cap and trade programs along these dimensions and construct a general model of permit validity and compliance timing. We derive sufficient conditions under which abatement is invariant to compliance timing, i.e., compliance timing cannot smooth abatement cost shocks. Under these conditions, (i) expected compliance costs are invariant, (ii) the variance of compliance costs increases with the delayed compliance, (iii) equilibrium prices may not be unique, and (iv) the delayed compliance equilibrium may rely on “degenerate” prices not determined by marginal abatement costs. We demonstrate the model's broad applicability by illustrating different types of temporal permit validity.

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Bibliographic Info

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

Volume (Year): 66 (2013)
Issue (Month): 3 ()
Pages: 671-687

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Handle: RePEc:eee:jeeman:v:66:y:2013:i:3:p:671-687

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

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Keywords: Emissions permits; Banking; Borrowing; Delayed compliance; Abatement cost shocks;

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Cited by:
  1. Hasegawa, Makoto & Salant, Stephen, 2012. "Cap-and-Trade Programs under Delayed Compliance," Discussion Papers dp-12-32, Resources For the Future.
  2. Stephen P. Holland & Michael R. Moore, 2012. "Market Design in Cap and Trade Programs: Permit Validity and Compliance Timing," NBER Working Papers 18098, National Bureau of Economic Research, Inc.
  3. Benjamin Leard, 2013. "The Welfare Effects of Allowance Banking in Emissions Trading Programs," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 55(2), pages 175-197, June.

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