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Emissions Trading: ERCs or Allowances

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Author Info
Donald N. Dewees

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Abstract

There are two principal choices of the baseline from which emissions trading may take place: 1) emission reduction credits (ERCs) in which the baseline is existing regulations which are often activity-based; and 2) cap-and-trade which specified the total allowable emissions. This paper examines the effects of these two tradable permit systems on marginal and average costs for the firm, using electricity generation as an example. The ERC system subsidises the activity level to which it is tied, failing to incorporate the full cost of external harm into the product price. The cap-and-trade system is more efficient.

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File URL: http://repec.economics.utoronto.ca/files/UT-ECIPA-DEWEES-00-01.pdf
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Publisher Info
Paper provided by University of Toronto, Department of Economics in its series Working Papers with number dewees-00-01.

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Length: 37 pages
Date of creation: 11 Jul 2000
Date of revision:
Handle: RePEc:tor:tecipa:dewees-00-01

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Related research
Keywords: air pollution; emissions trading; allowances; emission reduction credits; cap and trade; electricity generation; externality;

Find related papers by JEL classification:
Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Michael Ari Prager & Thomas H. Klier & Richard H. Mattoon, 1996. "A mixed bag: assessment of market performance and firm trading behavior in the NOx RECLAIM program," Working Paper Series, Regional Economic Issues WP-96-12, Federal Reserve Bank of Chicago. [Downloadable!]
  2. Raymond S. Hartman & Kirkor Bozdogan & Ravindra M. Nadkarni, 1979. "The Economic Impacts of Environmental Regulations on the U.S. Copper Industry," Bell Journal of Economics, The RAND Corporation, vol. 10(2), pages 589-618, Autumn. [Downloadable!] (restricted)
  3. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December. [Downloadable!] (restricted)
  4. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Blackwell Publishing, vol. 41(4), pages 477-91, October. [Downloadable!] (restricted)
    Other versions:
  5. Helfand, Gloria E, 1991. "Standards versus Standards: The Effects of Different Pollution Restrictions," American Economic Review, American Economic Association, vol. 81(3), pages 622-34, June. [Downloadable!] (restricted)
  6. Joskow, Paul L & Schmalensee, Richard & Bailey, Elizabeth M, 1998. "The Market for Sulfur Dioxide Emissions," American Economic Review, American Economic Association, vol. 88(4), pages 669-85, September. [Downloadable!] (restricted)
  7. Reinert, Kenneth A. & Ratick, Samuel J., 1988. "A note on estimating a long-run average cost curve for flue gas desulfurization," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 30-34, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sterner, Thomas & Muller, Adrian, 2006. "Output and Abatement Effects of Allocation Readjustment in Permit Trade," Discussion Papers dp-06-49, Resources For the Future. [Downloadable!]
  2. Donald N. Dewees, 2003. "Price and Environment in Electricity Restructuring," Working Papers dewees-01-01, University of Toronto, Department of Economics. [Downloadable!]
  3. Neil J. Buckley, 2004. "Short-Run Implications of Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: Experimental Evidence," Department of Economics Working Papers 2004-05, McMaster University. [Downloadable!]
  4. Neil J. Buckley & R. Andrew Muller & Stuart Mestelman, 2004. "Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: Experimental Evidence Under Variable Output Capacity," McMaster Experimental Economics Laboratory Publications 2004-06, McMaster University. [Downloadable!]
  5. John Pezzey, 2003. "Emission Taxes and Tradeable Permits A Comparison of Views on Long-Run Efficiency," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 26(2), pages 329-342, October. [Downloadable!] (restricted)
  6. Neil J. Buckley, 2004. "Short-Run Implications of Cap-and-Trade versus Baseline-and-Credit Emission Trading Plans: Experimental Evidence," McMaster Experimental Economics Laboratory Publications 2004-03, McMaster University. [Downloadable!]
  7. Neil J. Buckley, R. Andrew Muller, and Stuart Mestelman, 2005. "Baseline-and-Credit Style Emission Trading Mechanisms: An Experimental Investigation of Economic Inefficiency," Department of Economics Working Papers 2005-04, McMaster University. [Downloadable!]
  8. R. Andrew Muller, 1999. "Emissions trading without a quantity constraint," Department of Economics Working Papers 1999-13, McMaster University. [Downloadable!]
  9. John C. V. Pezzey, 2002. "EmissionTaxes and Tradable Permits: A Comparison of views on Long Run Efficiency," Economics and Environment Network Working Papers 0210, Australian National University, Economics and Environment Network. [Downloadable!]
  10. Neil J. Buckley, R. Andrew Muller, and Stuart Mestelman, 2005. "Baseline-and-Credit Emission Permit Trading: Experimental Evidence Under Variable Output Capacity," Department of Economics Working Papers 2005-03, McMaster University. [Downloadable!]
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