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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.

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Bibliographic Info

Article provided by University of Wisconsin Press in its journal Land Economics.

Volume (Year): 77 (2001)
Issue (Month): 4 ()
Pages: 513-526

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Handle: RePEc:uwp:landec:v:77:y:2001:i:4:p:513-526

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  1. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, Elsevier, vol. 5(3), pages 395-418, December.
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  4. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  5. Joskow, Paul L & Schmalensee, Richard & Bailey, Elizabeth M, 1998. "The Market for Sulfur Dioxide Emissions," American Economic Review, American Economic Association, American Economic Association, vol. 88(4), pages 669-85, September.
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Cited by:
  1. Neil J. Buckley, 2004. "Short-Run Implications of Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: Experimental Evidence," Department of Economics Working Papers 2004-05, McMaster University.
  2. V. Oikonomou & C. Jepma, 2008. "A framework on interactions of climate and energy policy instruments," Mitigation and Adaptation Strategies for Global Change, Springer, Springer, vol. 13(2), pages 131-156, February.
  3. Sterner, Thomas & Muller, Adrian, 2006. "Output and Abatement Effects of Allocation Readjustment in Permit Trade," Discussion Papers, Resources For the Future dp-06-49, Resources For the Future.
  4. 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, McMaster University 2004-06, McMaster University.
  5. Pezzey, John C.V., 2003. "Emission Taxes and Tradable Permits: A Comparison of Views on Long Run Efficiency," 2003 Conference (47th), February 12-14, 2003, Fremantle, Australia, Australian Agricultural and Resource Economics Society 58198, Australian Agricultural and Resource Economics Society.
  6. 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.
  7. Woodward, Richard T, 2010. "Double Dipping in Environmental Markets," MPRA Paper 26185, University Library of Munich, Germany.
  8. Evy Crals & Lode Vereeck, 2005. "Taxes, Tradable Rights and Transaction Costs," European Journal of Law and Economics, Springer, Springer, vol. 20(2), pages 199-223, September.
  9. R. Andrew Muller, 1999. "Emissions trading without a quantity constraint," Department of Economics Working Papers 1999-13, McMaster University.
  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, McMaster University 2004-03, McMaster University.
  11. Woodward, Richard T. & Han, Manseung, 2004. "Double Dipping In Pollution Markets," 2004 Annual meeting, August 1-4, Denver, CO, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 20323, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  12. de, Vries Frans & Dijkstra, Bouwe R & McGinty, Matthew, 2011. "Emissions Trading and Intersectoral Dynamics: Absolute versus Relative Design Schemes," Stirling Economics Discussion Papers, University of Stirling, Division of Economics 2011-15, University of Stirling, Division of Economics.
  13. 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.
  14. Donald N. Dewees, 2003. "Price and Environment in Electricity Restructuring," Working Papers, University of Toronto, Department of Economics dewees-01-01, University of Toronto, Department of Economics.
  15. 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, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 44(1), pages 107-136, September.

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