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Trading for the future: Signaling in permit markets

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  • Harstad, Bård
  • Eskeland, Gunnar S.

Abstract

Permit markets are celebrated as a policy instrument since they allow (i) firms to equalize marginal costs through trade and (ii) the regulator to distribute the burden in a politically desirable way. These two concerns, however, may conflict in a dynamic setting. Anticipating the regulator's future desire to give more permits to firms that appear to need them, firms purchase permits to signal their need. This raises the price above marginal costs and the market becomes inefficient. If the social cost of pollution is high and the government intervenes frequently in the market, the distortions are greater than the gains from trade and non-tradable permits are better. The analysis helps to understand permit markets and how they should be designed.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 94 (2010)
Issue (Month): 9-10 (October)
Pages: 749-760

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Handle: RePEc:eee:pubeco:v:94:y:2010:i:9-10:p:749-760

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Web page: http://www.elsevier.com/locate/inca/505578

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Keywords: Tradable permits Time inconsistency The ratchet effect Rent-seeking Plan versus market;

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Citations

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Cited by:
  1. Michael Jakob & Kai Lessmann, 2012. "Signaling in international environmental agreements: the case of early and delayed action," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 12(4), pages 309-325, November.
  2. Knut Einar Rosendahl & Jon Strand, 2012. "Emissions trading with offset markets and free quota allocations," Discussion Papers 719, Research Department of Statistics Norway.
  3. Eskeland, Gunnar S. & Mideksa, Torben K., 2008. "Transportation fuel use, technology and standards: The role of credibility and expectations," Policy Research Working Paper Series 4695, The World Bank.
  4. Dallas Burtraw & Karen Palmer, 2008. "Compensation rules for climate policy in the electricity sector," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(4), pages 819-847.
  5. Beat Hintermann, 2013. "Market Power in Emission Permit Markets: Theory and Evidence," CESifo Working Paper Series 4447, CESifo Group Munich.

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