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Modeling of Emission Allowance Markets: A Literature Review

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  • Vincent Bertrand

Abstract

This 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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File URL: http://cec-repec.site11.com/RePEc/cec/wpaper/13-04-Cahier-R-2013-04-Bertrand.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Chaire Economie du Climat in its series Working Papers with number 1304.

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Length: 30 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:cec:wpaper:1304

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Keywords: Emission Trading; EU ETS; Partial Equilibrium Modeling;

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References

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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.
  2. Scott E. Atkinson, 1983. "Marketable Pollution Permits and Acid Rain Externalities," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 16(4), pages 704-22, November.
  3. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
  4. Seifert, Jan & Uhrig-Homburg, Marliese & Wagner, Michael, 2008. "Dynamic behavior of CO2 spot prices," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 180-194, September.
  5. Kling, Catherine L. & Rubin, Jonathan, 1997. "Bankable Permits for the Control of Environmental Pollution," Staff General Research Papers, Iowa State University, Department of Economics 1479, Iowa State University, Department of Economics.
  6. Juan-Pablo Montero, 2009. "Market Power in Pollution Permit Markets," Documentos de Trabajo, Instituto de Economia. Pontificia Universidad Católica de Chile. 355, Instituto de Economia. Pontificia Universidad Católica de Chile..
  7. Springer, Urs, 2003. "The market for tradable GHG permits under the Kyoto Protocol: a survey of model studies," Energy Economics, Elsevier, Elsevier, vol. 25(5), pages 527-551, September.
  8. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 17(1), pages 59-82, Winter.
  9. Chevallier, Julien, 2012. "Banking and Borrowing in the EU ETS: A Review of Economic Modelling, Current Provisions and Prospects for Future Design," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/4611, Paris Dauphine University.
  10. Hintermann, Beat, 2010. "Allowance price drivers in the first phase of the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 43-56, January.
  11. Luca Taschini, 2010. "Environmental economics and modeling marketable permits," Grantham Research Institute on Climate Change and the Environment Working Papers, Grantham Research Institute on Climate Change and the Environment 25, Grantham Research Institute on Climate Change and the Environment.
  12. Cronshaw, Mark B & Brown-Kruse, Jamie, 1996. "Regulated Firms in Pollution Permit Markets with Banking," Journal of Regulatory Economics, Springer, Springer, vol. 9(2), pages 179-89, March.
  13. Innes, Robert, 2003. "Stochastic pollution, costly sanctions, and optimality of emission permit banking," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 546-568, May.
  14. Vincent Bertrand, 2012. "Understanding fuel switching under the EU ETS," International Journal of Global Energy Issues, Inderscience Enterprises Ltd, Inderscience Enterprises Ltd, vol. 35(6), pages 494-517.
  15. 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.
  16. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
  17. Bertrand, Vincent, 2012. "Understanding fuel switching under the EU ETS," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/12955, Paris Dauphine University.
  18. Luca Taschini, 2010. "Environmental Economics and Modeling Marketable Permits," Asia-Pacific Financial Markets, Springer, Springer, vol. 17(4), pages 325-343, December.
  19. Hahn, Robert W, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(4), pages 753-65, November.
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