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Emissions Trading: ERCs or Allowances?

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  • Donald N. Dewees

Abstract

Emissions trading takes place from two alternative baselines: 1) emission reduction credits (ERCs) in which the baseline is existing regulations which are often activity-based; or 2) cap-and-trade which specifies the total allowable emissions. This paper examines the effects of these two tradable permit systems on marginal and average costs for the firm, using electricity generation as an example. The ERC system subsidizes the activity level to which it is tied and fails to incorporate the full cost of external harm into the product price. If the permit limit is chosen ef- ficiently, the cap-and-trade system is more effi - cient.

Suggested Citation

  • Donald N. Dewees, 2001. "Emissions Trading: ERCs or Allowances?," Land Economics, University of Wisconsin Press, vol. 77(4), pages 513-526.
    • Handle: RePEc:uwp:landec:v:77:y:2001:i:4:p:513-526
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    Cited by:

    1. Bing Zhang & Yongliang Zhang, 2016. "Policy Conflicts and the Performance of Emissions Trading Markets: An Adaptive Agent-based Analysis," EEPSEA Research Report rr20160339, Economy and Environment Program for Southeast Asia (EEPSEA), revised Mar 2016.
    2. John Pezzey, 2003. "Emission Taxes and Tradeable Permits A Comparison of Views on Long-Run Efficiency," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 26(2), pages 329-342, October.
    3. Sterner, Thomas & Muller, Adrian, 2006. "Output and Abatement Effects of Allocation Readjustment in Permit Trade," RFF Working Paper Series dp-06-49, Resources for the Future.
    4. R. Andrew Muller, 1999. "Emissions trading without a quantity constraint," Department of Economics Working Papers 1999-13, McMaster University.
    5. V. Oikonomou & C. Jepma, 2008. "A framework on interactions of climate and energy policy instruments," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 13(2), pages 131-156, February.
    6. Evy Crals & Lode Vereeck, 2005. "Taxes, Tradable Rights and Transaction Costs," European Journal of Law and Economics, Springer, vol. 20(2), pages 199-223, September.
    7. Zhang, Cheng & Wang, Qunwei & Shi, Dan & Li, Pengfei & Cai, Wanhuan, 2016. "Scenario-based potential effects of carbon trading in China: An integrated approach," Applied Energy, Elsevier, vol. 182(C), pages 177-190.
    8. Woerdman Edwin & Nentjes Andries, 2019. "Emissions Trading Hybrids: The Case of the EU ETS," Review of Law & Economics, De Gruyter, vol. 15(1), pages 1-32, March.
    9. de, Vries Frans & Dijkstra, Bouwe R & McGinty, Matthew, 2011. "Emissions Trading and Intersectoral Dynamics: Absolute versus Relative Design Schemes," Stirling Economics Discussion Papers 2011-15, University of Stirling, Division of Economics.
    10. Neil J. Buckley, 2004. "Short-Run Implications of Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: Experimental Evidence," McMaster Experimental Economics Laboratory Publications 2004-03, McMaster University.
    11. Neil J. Buckley & R. Andrew Muller & Stuart Mestelman, 2004. "Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: Experimental Evidence Under Variable Output Capacity," McMaster Experimental Economics Laboratory Publications 2004-06, McMaster University.
    12. Neil J. Buckley & R. Andrew Muller & Stuart Mestelman, 2005. "Baseline-and-Credit Style Emission Trading Mechanisms: An Experimental Investigation of Economic Inefficiency," Department of Economics Working Papers 2005-04, McMaster University.
    13. Woodward, Richard T., 2011. "Double-dipping in environmental markets," Journal of Environmental Economics and Management, Elsevier, vol. 61(2), pages 153-169, March.
    14. Zhong Wang & Mingyu Wu & Shixiang Li & Changji Wang, 2021. "The Effect Evaluation of China’s Energy-Consuming Right Trading Policy: Empirical Analysis Based on PSM-DID," Sustainability, MDPI, vol. 13(21), pages 1-16, October.
    15. Donald N. Dewees, 2003. "Price and Environment in Electricity Restructuring," Working Papers dewees-01-01, University of Toronto, Department of Economics.
    16. Woodward, Richard T. & Han, Manseung, 2004. "Double Dipping In Pollution Markets," 2004 Annual meeting, August 1-4, Denver, CO 20323, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    17. Jan-Tjeerd Boom & Bouwe Dijkstra, 2009. "Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading Under Perfect and Imperfect Competition," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 44(1), pages 107-136, September.
    18. Neil J. Buckley & Stuart Mestelman & R. Andrew Muller, 2014. "Production Capacity and Abatement Technology Strategies in Emissions Trading Markets," Department of Economics Working Papers 2014-16, McMaster University.
    19. Neil J. Buckley & R. Andrew Muller & Stuart Mestelman, 2005. "Baseline-and-Credit Emission Permit Trading: Experimental Evidence Under Variable Output Capacity," Department of Economics Working Papers 2005-03, McMaster University.
    20. Frans Vries & Bouwe Dijkstra & Matthew McGinty, 2014. "On Emissions Trading and Market Structure: Cap-and-Trade versus Intensity Standards," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 58(4), pages 665-682, August.

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    JEL classification:

    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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