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Intertemporal Permit Trading for the Control of Greenhouse Gas Emissions

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  • Paul Leiby

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  • Jonathan Rubin

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    Abstract

    This paper integrates two themes in the intertemporal permitliterature through the construction of an intertemporal bankingsystem for a pollutant that creates both stock and flow damages. A permit banking system for the special case of a pollutant thatonly causes stock damages is also developed. This latter,simpler case corresponds roughly to the greenhouse gas emissionreduction regime proposed by the U.S. Department of State as ameans of fulfilling the U.S. commitment to the FrameworkConvention on Climate Change. This paper shows that environmentalregulators can achieve the socially optimal level of emissionsand output through time by setting the correct total sum ofallowable emissions, and specifying the correct intertemporaltrading ratio for banking and borrowing. For the case ofgreenhouse gases, we show that the optimal growth rate of permitprices, and therefore the optimal intertemporal trading rate, hasthe closed-form solution equal to the ratio of current marginalstock damages to the discounted future value of marginal stockdamages less the decay rate of emissions in the atmosphere. Given a non-optimal negotiated emission path we then derive apermit banking system that has the potential to lower net socialcosts by adjusting the intertemporal trading ratio taking intoaccount the behavior of private agents. We use a simplenumerical simulation model to illustrate the potential gains fromvarious possible banking systems. Copyright Kluwer Academic Publishers 2001

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    File URL: http://hdl.handle.net/10.1023/A:1011124215404
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    Bibliographic Info

    Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

    Volume (Year): 19 (2001)
    Issue (Month): 3 (July)
    Pages: 229-256

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    Handle: RePEc:kap:enreec:v:19:y:2001:i:3:p:229-256

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    Web page: http://www.springerlink.com/link.asp?id=100263

    Related research

    Keywords: emission trading; greenhouse gases; marketable permits; stock pollutant;

    References

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    1. Cronshaw, Mark B & Brown-Kruse, Jamie, 1996. "Regulated Firms in Pollution Permit Markets with Banking," Journal of Regulatory Economics, Springer, vol. 9(2), pages 179-89, March.
    2. Falk Ita & Mendelsohn Robert, 1993. "The Economics of Controlling Stock Pollutants: An Efficient Strategy for Greenhouse Gases," Journal of Environmental Economics and Management, Elsevier, vol. 25(1), pages 76-88, July.
    3. Kling, Catherine L. & Rubin, Jonathan, 1997. "Bankable Permits for the Control of Environmental Pollution," Staff General Research Papers 1479, Iowa State University, Department of Economics.
    4. Jackson, Tim, 1995. "Joint implementation and cost-effectiveness under the Framework Convention on Climate Change," Energy Policy, Elsevier, vol. 23(2), pages 117-138, February.
    5. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521311120, October.
    6. Burtraw, Dallas, 1995. "Cost Savings sans Allowance Trades? Evaluating the SO2 Emission Trading Program to Date," Discussion Papers dp-95-30-rev, Resources For the Future.
    7. Nordhaus, William D & Yang, Zili, 1996. "A Regional Dynamic General-Equilibrium Model of Alternative Climate-Change Strategies," American Economic Review, American Economic Association, vol. 86(4), pages 741-65, September.
    8. Biglaiser, Gary & Horowitz, John K & Quiggin, John, 1995. "Dynamic Pollution Regulation," Journal of Regulatory Economics, Springer, vol. 8(1), pages 33-44, July.
    9. Richard F. Kosobud & Thomas A. Daly David W. South & Kevin G. Quinn, 1994. "Tradable Cumulative CO2 Permits and Global Warming Control," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 213-232.
    10. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
    11. McGartland, Albert M. & Oates, Wallace E., 1985. "Marketable permits for the prevention of environmental deterioration," Journal of Environmental Economics and Management, Elsevier, vol. 12(3), pages 207-228, September.
    12. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, October.
    13. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    14. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
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