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Carbon markets in space and time

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  • Sam Fankhauser
  • Cameron Hepburn
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    Abstract

    This paper analyses the design of carbon markets in time (intertemporally) and space (geographically) from first principles, starting initially with a relatively clean slate and asking what an optimal global carbon market would look like by around 2030. Our focus is on firmlevel trading systems, although much of what we say would also apply to government-level trading (e.g., AAU trading under the Kyoto Protocol). We examine the “first principles” of design to maximise flexibility and to minimise costs, consider temporal design including banking and borrowing and other mechanisms to provide greater carbon price predictability and credibility over time, and consider spatial elements, examining the key design issues in linking national and regional carbon markets together to create a global carbon market.

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    File URL: http://www.lse.ac.uk/GranthamInstitute/publications/WorkingPapers/Papers/WPapers%201%20-%209/WorkingPaper3.pdf
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    Bibliographic Info

    Paper provided by Grantham Research Institute on Climate Change and the Environment in its series Grantham Research Institute on Climate Change and the Environment Working Papers with number 3.

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    Date of creation: Jul 2009
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    Handle: RePEc:lsg:lsgwps:wp03

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    References

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    1. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
    2. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521311120, October.
    3. Warwick J. McKibbin & Peter J. Wilcoxen, 2003. "Estimates of the Costs of Kyoto-Marrakesh versus the McKibbin-Wilcoxen Blueprint," Economics and Environment Network Working Papers 0305, Australian National University, Economics and Environment Network.
    4. David S. Jacks & Kevin H. O'Rourke & Jeffrey G. Williamson, 2011. "Commodity Price Volatility and World Market Integration since 1700," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 800-813, August.
    5. 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.
    6. Pizer, William & Newell, Richard, 1998. "Regulating Stock Externalities Under Uncertainty," Discussion Papers dp-99-10-rev, Resources For the Future.
    7. Brian C. Murray & Richard G. Newell & William A. Pizer, 2008. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," NBER Working Papers 14258, National Bureau of Economic Research, Inc.
    8. Jacoby, Henry D. & Ellerman, A. Denny, 2004. "The safety valve and climate policy," Energy Policy, Elsevier, vol. 32(4), pages 481-491, March.
    9. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
    10. Roland Ismer & Karsten Neuhoff, 2007. "Border tax adjustment: a feasible way to support stringent emission trading," European Journal of Law and Economics, Springer, vol. 24(2), pages 137-164, October.
    11. Warwick J. McKibbin & Peter J. Wilcoxen, 2002. "The Role of Economics in Climate Change Policy," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 107-129, Spring.
    12. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, October.
    13. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
    14. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
    15. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
    16. Manne, Alan & Richels, Richard, 1996. "The Berlin Mandate: The costs of meeting post-2000 targets and timetables," Energy Policy, Elsevier, vol. 24(3), pages 205-210, March.
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    Cited by:
    1. Samuel Fankhauser & Nat Martin & Stephen Prichard, 2009. "The economics of the CDM levy: revenue potential, tax incidence and distortionary effects," LSE Research Online Documents on Economics 37604, London School of Economics and Political Science, LSE Library.

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