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The Welfare Effects of Allowance Banking in Emissions Trading Programs

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  • Benjamin Leard

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    Abstract

    Permitting allowance banking in emissions trading programs can reduce expected compliance costs by giving capped firms flexibility to adjust the time path of abatement and to hedge against future uncertainty. Recent literature suggests that this compliance cost dividend is significant (Fell and Morgenstern Environ Resour Econ 47:275–297, 2010 ). Allowance banking may yield an environmental dividend (a) if the growth rate of marginal damages from emissions is less than the discount rate and (b) if emissions are lower in the short run as firms bank permits for use in later periods. A discrete, stochastic dynamic programming model is considered to simulate the two dividends of allowance banking in the context of the most recent Federal United States greenhouse gas cap-and-trade legislation. Simulation results show that under a range of parameter values, the environmental dividend has the same order of magnitude as the compliance cost dividend. Under the central set of parameters, allowance banking increases expected present value of benefits by about $$350$$ million dollars per year of the program. The environmental dividend, however, is completely eliminated if capped firms can borrow permits from future periods without limit. Copyright Springer Science+Business Media Dordrecht 2013

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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): 55 (2013)
    Issue (Month): 2 (June)
    Pages: 175-197

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    Handle: RePEc:kap:enreec:v:55:y:2013:i:2:p:175-197

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

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    Keywords: Allowance banking; Cap and trade; Social cost of carbon;

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    1. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
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    3. Fell, Harrison & Morgenstern, Richard, 2009. "Alternative Approaches to Cost Containment in a Cap-and-Trade System," Discussion Papers dp-09-14, Resources For the Future.
    4. Kling, Catherine & Rubin, Jonathan, 1997. "Bankable permits for the control of environmental pollution," Journal of Public Economics, Elsevier, vol. 64(1), pages 101-115, April.
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    11. 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.
    12. Schennach, Susanne M., 2000. "The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 189-210, November.
    13. A. Denny Ellerman & Juan-Pablo Montero, 2007. "The Efficiency and Robustness of Allowance Banking in the U.S. Acid Rain Program," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 47-72.
    14. Paul Leiby & Jonathan Rubin, 2001. "Intertemporal Permit Trading for the Control of Greenhouse Gas Emissions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 19(3), pages 229-256, July.
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