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Emission trading in Europe with an exchange rate


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  • Ger Klaassen
  • Finn Førsund
  • Markus Amann


This paper explores the analytical and empirical properties of a new method for emission trading according to a fixed exchange rate. The exchange rate is based on the ratios of the marginal costs of abatement in the optimal solution in order to account for the impact of the location of emission sources on the deposition. It is shown that, generally, this system will not achieve the optimal solution and does not guarantee that environmental deposition constraints are not violated, although total abatement costs are always reduced. A routine was developed to mimic trading as a bilateral, sequential process, subject to an exchange rate. In the example used, results for SO 2 emissions in Europe show that, starting from a uniform reduction, exchange-rate trading achieves higher cost savings than one-to-one trading, without achieving the cost minimum. Sulfur deposition targets are not violated since the initial emission allocation overfulfilled targets at many places. The results are sensitive to: pre-trade emission levels, the transaction costs, the availability of information on potential cost savings and assumptions made on the behavior of trading partners. Copyright Kluwer Academic Publishers 1994

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Bibliographic Info

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

Volume (Year): 4 (1994)
Issue (Month): 4 (August)
Pages: 305-330

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Handle: RePEc:kap:enreec:v:4:y:1994:i:4:p:305-330

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Keywords: Emission trading; air pollution; economic instruments; costs; europe; sulfur;


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  1. Atkinson, Scott & Tietenberg, Tom, 1991. "Market failure in incentive-based regulation: The case of emissions trading," Journal of Environmental Economics and Management, Elsevier, vol. 21(1), pages 17-31, July.
  2. Krupnick, Alan J. & Oates, Wallace E. & Van De Verg, Eric, 1983. "On marketable air-pollution permits: The case for a system of pollution offsets," Journal of Environmental Economics and Management, Elsevier, vol. 10(3), pages 233-247, September.
  3. 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.
  4. Hahn, Robert W, 1989. "Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor's Orders," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 95-114, Spring.
  5. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
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Cited by:
  1. Nicholas Z. Muller & Robert Mendelsohn, 2009. "Efficient Pollution Regulation: Getting the Prices Right," American Economic Review, American Economic Association, vol. 99(5), pages 1714-39, December.
  2. Hung, Ming-Feng & Shaw, Daigee, 2005. "A trading-ratio system for trading water pollution discharge permits," Journal of Environmental Economics and Management, Elsevier, vol. 49(1), pages 83-102, January.
  3. Liao, Chao-Ning, 2007. "Modelling a mixed system of air pollution fee and tradable permits for controlling nitrogen oxide: a case study of Taiwan," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 51(4), December.
  4. Krysiak, Frank C. & Schweitzer, Patrick, 2010. "The optimal size of a permit market," Journal of Environmental Economics and Management, Elsevier, vol. 60(2), pages 133-143, September.
  5. Fernando Rodríguez, 2000. "On the Use of Exchange Rates as Trading Rules in a Bilateral System of Transferable Discharge Permits," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 15(4), pages 379-395, April.
  6. Finn Førsund & Eric NÆvdal, 1998. "Efficiency Gains Under Exchange-Rate Emission Trading," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 12(4), pages 403-423, December.
  7. Finus, Michael & Tjotta, Sigve, 2003. "The Oslo Protocol on sulfur reduction: the great leap forward?," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2031-2048, September.
  8. Bailey, Peter D & Gough, Clair A & Millock, Katrin & Chadwick, Michael J, 1996. "Prospects for the joint implementation of sulphur emission reductions in Europe," Energy Policy, Elsevier, vol. 24(6), pages 507-516, June.
  9. Olivier Godard, 1998. "Les permis d'émission négociables et la lutte contre la pollution atmosphérique," Post-Print hal-00622857, HAL.
  10. Y. Ermoliev & M. Michalevich & A. Nentjes, 2000. "Markets for Tradeable Emission and Ambient Permits: A Dynamic Approach," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 15(1), pages 39-56, January.
  11. Chao-Ning Liao, 2009. "Technology adoption decisions under a mixed regulatory system of tradable permits and air pollution fees for the control of Total Suspended Particulates in Taiwan," Journal of Regulatory Economics, Springer, vol. 35(2), pages 135-153, April.
  12. Francois Destandau & Amir Nafi, 2010. "What is the Best Distribution for Pollution Abatement Efforts? Information for Optimizing the WFD Programs of Measures," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 46(3), pages 337-358, July.
  13. Brockmann, Karl Ludwig & Koschel, Henrike & Schmidt, Tobias F. N., 1998. "Tradable SO-2-permits in the European Union: a practicable scheme for public utilities," ZEW Discussion Papers 98-15, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  14. Fernando Rodríguez, 1999. "Joint Implementation under the Second Sulfur Protocol: Analysis and Simulation," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 13(2), pages 143-168, March.
  15. F.R. Forsund, 2000. "An Economic Interpretation of the Compensation Mechanism in the RAINS Model," Working Papers ir00036, International Institute for Applied Systems Analysis.
  16. Finn R. Førsund & Ove Wolfgang, 2002. "The Compensation mechanism in the rains model: the Norwegian targets for acidification," ICER Working Papers 13-2002, ICER - International Centre for Economic Research.


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