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Banking Permits: Economic Efficiency and Distributional Effects

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  • Valentina Bosetti

    (Fondazione Eni Enrico Mattei)

  • Carlo Carraro

    (Fondazione Eni Enrico Mattei, University of Venice, CEPR, CESifo and CEPS)

  • Emanuele Massetti

    (Fondazione Eni Enrico Mattei and Catholic University)

Abstract

Most analyses of the Kyoto flexibility mechanisms focus on the cost effectiveness of “where” flexibility (e.g. by showing that mitigation costs are lower in a global permit market than in regional markets or in permit markets confined to Annex 1 countries). Less attention has been devoted to “when” flexibility, i.e. to the benefits of allowing emission permit traders to bank their permits for future use. In the model presented in this paper, banking of carbon allowances in a global permit market is fully endogenised, i.e. agents may decide to bank permits by taking into account their present and future needs and the present and future decisions of all the other agents. It is therefore possible to identify under what conditions traders find it optimal to bank permits, when banking is socially optimal, and what are the implications for present and future permit prices. We can also explain why the equilibrium rate of growth of permit prices is likely to be larger than the equilibrium interest rate. Most importantly, this paper analyses the efficiency and distributional consequences of allowing markets to optimally allocate emission permits across regions and over time. The welfare and distributional effects of an optimal intertemporal emission trading scheme are assessed for different initial allocation rules. Finally, the impact of banking on carbon emissions, technological progress, and optimal investment decisions is quantified and the incentives that banking provides to accelerate technological innovation and diffusion are also discussed. Among the many results, we show that not only does banking reduce abatement costs, but it also increases the amount of GHG emissions abated in the short-term. It should therefore belong to all emission trading schemes under construction.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2008.1.

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Date of creation: Jan 2008
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Handle: RePEc:fem:femwpa:2008.1

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Keywords: Emission Trading; Banking;

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References

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  1. Matti Liski & Juan-Pablo Montero, 2005. "A Note on Market Power in an Emission Permits Market with Banking," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 31(2), pages 159-173, 06.
  2. Valentina Bosetti & Carlo Carraro & Emanuele Massetti & Massimo Tavoni, 2007. "Optimal Energy Investment and R&D Strategies to Stabilise Greenhouse Gas Atmospheric Concentrations," CESifo Working Paper Series 2133, CESifo Group Munich.
  3. Valentina Bosetti & Carlo Carraro & Emanuele Massetti & Massimo Tavoni, 2007. "International Energy R&D Spillovers and the Economics of Greenhouse Gas Atmospheric Stabilization," Working Papers 2007.82, Fondazione Eni Enrico Mattei.
  4. Valentina Bosetti, Carlo Carraro, Marzio Galeotti, Emanuele Massetti, Massimo Tavoni, 2006. "A World induced Technical Change Hybrid Model," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 13-38.
  5. 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.
  6. Cronshaw, Mark B & Brown-Kruse, Jamie, 1996. "Regulated Firms in Pollution Permit Markets with Banking," Journal of Regulatory Economics, Springer, vol. 9(2), pages 179-89, March.
  7. 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.
  8. Richard Newell & William Pizer & Jiangfeng Zhang, 2005. "Managing Permit Markets to Stabilize Prices," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 31(2), pages 133-157, 06.
  9. Marzio Galeotti & Carlo Carraro, 2004. "Does Endogenous Technical Change Make a Difference in Climate Policy Analysis? A Robustness Exercise with the FEEM-RICE Model," Working Papers 2004.152, Fondazione Eni Enrico Mattei.
  10. Stuart Mestelman & Andrew Muller, 1997. "Emissions Trading with Shares and Coupons when Control over Discharges is Uncertain," McMaster Experimental Economics Laboratory Publications 1997-01, McMaster University.
  11. Valentina Bosetti & Carlo Carraro & Marzio Galeotti & Emanuele Massetti & Massimo Tavoni, 2006. "WITCH. A World Induced Technical Change Hybrid Model," Working Papers 2006_46, Department of Economics, University of Venice "Ca' Foscari".
  12. 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.
  13. 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.
  14. Springer, Urs, 2003. "The market for tradable GHG permits under the Kyoto Protocol: a survey of model studies," Energy Economics, Elsevier, vol. 25(5), pages 527-551, September.
  15. Valentina Bosetti & Emanuele Massetti & Massimo Tavoni, 2007. "The WITCH Model. Structure, Baseline, Solutions," Working Papers 2007.10, Fondazione Eni Enrico Mattei.
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Citations

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Cited by:
  1. Duval, Romain & de la Maisonneuve, Christine, 2010. "Long-run growth scenarios for the world economy," Journal of Policy Modeling, Elsevier, vol. 32(1), pages 64-80, January.
  2. Bosetti, Valentina & Carraro, Carlo & Tavoni, Massimo, 2008. "Delayed Participation of Developing Countries to Climate Agreements: Should Action in the EU and US be Postponed?," CEPR Discussion Papers 6967, C.E.P.R. Discussion Papers.
  3. Julien Chevallier, 2012. "Banking And Borrowing In The Eu Ets: A Review Of Economic Modelling, Current Provisions And Prospects For Future Design," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 157-176, 02.
  4. Karsten Neuhoff & Anne Schopp & Rodney Boyd & Kateryna Stelmakh & Alexander Vasa, 2012. "Banking of Surplus Emissions Allowances: Does the Volume Matter?," Discussion Papers of DIW Berlin 1196, DIW Berlin, German Institute for Economic Research.
  5. Marschinski, Robert & Edenhofer, Ottmar, 2010. "Revisiting the case for intensity targets: Better incentives and less uncertainty for developing countries," Energy Policy, Elsevier, vol. 38(9), pages 5048-5058, September.
  6. Valentina Bosetti & Carlo Carraro & Massimo Tavoni, 2012. "Timing of Mitigation and Technology Availability in Achieving a Low-Carbon World," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 51(3), pages 353-369, March.

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