Modeling of Emission Allowance Markets: A Literature Review
AbstractThis paper reviews the development of emission trading models from the earliest to recent contributions. First, we introduce the economics of pollution control and the origins of emission trading. We give a brief description of policy instruments for the control of pollution, and explain why economic instruments (Pigouvian tax and emission trading) produce better results than “command-and-control” approaches. Second, we review several papers on modeling of emission trading systems, with a focus on dynamic models in case of perfect competition. We begin with the earliest static models, investigating a number of factor that can affect the effectiveness of emission trading (e.g. market power, transaction-costs, political pressures, etc). Next, we present dynamic models of permit markets, analysing questions such as banking/borrowing, relationship between spot and future markets, exogenous factors influencing the marginal abatement cost, etc. Finally, we end the paper with recent studies that model the main features of the European Emission Trading Scheme (EU ETS) in a dynamic framework with stochastic emissions.
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Bibliographic InfoPaper provided by Chaire Economie du Climat in its series Working Papers with number 1304.
Length: 30 pages
Date of creation: 2013
Date of revision:
Emission Trading; EU ETS; Partial Equilibrium Modeling;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-24 (All new papers)
- NEP-ENE-2013-09-24 (Energy Economics)
- NEP-ENV-2013-09-24 (Environmental Economics)
- NEP-EUR-2013-09-24 (Microeconomic European Issues)
- NEP-LAW-2013-09-24 (Law & Economics)
- NEP-REG-2013-09-24 (Regulation)
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