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Information Aggregation in Emissions Markets with Abatement

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  • Estelle Cantillon
  • Aurélie Slechten

Abstract

A key policy argument in favor of emissions markets (relative to command-and-control types of regulation) is their ability to aggregate dispersed information and generate price signals to guide firms trading and abatement decisions. We investigate this argument in a multi-period model where firms receive noisy private signals about their current period emissions and privately observe their previous period emissions before this information is made public to the rest of the market. Firms respond to information by trading and abating emissions. We show that there exists a rational expectations equilibrium that fully aggregates firms private information, justifying the policy argument in favor of emissions markets, in the absence of other frictions. We also derive predictions about how prices should be reacting to new private or public information and show that the possibility of abatement dampens the impact of shocks on prices. Finally, we show that the information aggregation result breaks down if firms abatement costs are also private information. JEL Codes: G14, D83, D84, D85, Q58. Keywords: Information Aggregation, Efficient Market Hypothesis, Price Formation, Emissions Trading.

Suggested Citation

  • Estelle Cantillon & Aurélie Slechten, 2018. "Information Aggregation in Emissions Markets with Abatement," Annals of Economics and Statistics, GENES, issue 132, pages 53-79.
  • Handle: RePEc:adr:anecst:y:2018:i:132:p:53-79
    DOI: 10.15609/annaeconstat2009.132.0053
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    References listed on IDEAS

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    Cited by:

    1. Quemin, Simon & Trotignon, Raphaël, 2021. "Emissions trading with rolling horizons," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    2. Baudry, Marc & Faure, Anouk & Quemin, Simon, 2021. "Emissions trading with transaction costs," Journal of Environmental Economics and Management, Elsevier, vol. 108(C).

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    More about this item

    Keywords

    Information Aggregation; Efficient Market Hypothesis; Price Formation; Emissions Trading.;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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