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Banking and backloading emission permits

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Author Info

  • Corinne Chaton

    (EDF R&D - EDF, CABREE - Centre for Applied Business Research in Energy and the Environment)

  • Anna Créti

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

  • Benoit Peluchon

    (EDF R&D - EDF)

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    Abstract

    In this article we focus on carbon price dynamics, more speci cally the impact of a policy envisaged by the European Commission to increase the CO2 price. This policy consists of removing a share of the allowances allocated for a period in order to reallocate some or all of them during the following period. To analyze the impact of this backloading we determine the CO2 market equilibrium with and without the policy, considering not only the market for permits but also the output market of regulated sectors. We propose a two-period model without uncertainty, where the market for permits is perfectly competitive, and the output market can be either com- petitive or oligopolistic. First, we de ne the condition for which banking from one period to another is optimal. This condition, that is the absence of arbitrage opportunities (AOA), depends on not only from the per period initial allocation but also on production market fundamentals. When this condition is satisfi ed, the market for emission is shown intertemporally efficient. Second, we show that the “back-loading”policy may be such that theAOA is no longer veri ed and thus create inefficiencies or being ineffective.

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    Bibliographic Info

    Paper provided by HAL in its series Working Papers with number hal-00915944.

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    Date of creation: 09 Dec 2013
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    Handle: RePEc:hal:wpaper:hal-00915944

    Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00915944
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    Related research

    Keywords: CO2 prices; banking; backloading; ETS reform.;

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    References

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    1. 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.
    2. 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.
    3. 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.
    4. Beat Hintermann, 2009. "Market Power and Windfall Profits in Emission Permit Markets," CEPE Working paper series 09-62, CEPE Center for Energy Policy and Economics, ETH Zurich.
    5. Juri Hinz & Alex Novikov, 2010. "On fair pricing of emission-related derivatives," Papers 1011.5792, arXiv.org.
    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.
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