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Analysis of prices in tradable emission markets: an empirical study of the regional clean air incentives market in Los Angeles

  • Lata Gangadharan

The Regional Clean Air Incentives Market is an emissions trading programme, which is expected to help in reducing oxides of nitrogen and sulphur from stationary sources in the Los Angeles area. This paper uses econometric techniques to determine the factors that can explain the development of the price of emission permits. By controlling for various characteristics of the trades, the regression results allow one to isolate the impact of each factor and conduct a detailed analysis of the implications of this factor on price. The results show that the price of permits is affected by institutional factors such as the trading rules and regulations governing the permit programme. The permits are priced higher in the coastal zone, higher for trades recorded in 1997 as compared to 1994 or 1995 and are affected by the trader category. Brokers are involved in well over half of the trades and have acquired a substantial inventory of permits. Facilities buying from brokers pay higher prices than if they buy from another facility. The price of trades beyond 2003 is higher than for current trades, which could be indicative of expectations of high growth rates in the Los Angeles region or due to expectation of more stringent regulations in the future.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/0003684042000269466
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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 36 (2004)
Issue (Month): 14 ()
Pages: 1569-1582

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Handle: RePEc:taf:applec:v:36:y:2004:i:14:p:1569-1582
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  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.
  2. Stavins, Robert & Whitehead, Bradley, 1996. "The Next Generation of Market-Based Environmental Policies," Discussion Papers dp-97-10, Resources For the Future.
  3. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-85, May.
  4. Foster, Vivien & Hahn, Robert W, 1995. "Designing More Efficient Markets: Lessons from Los Angeles Smog Control," Journal of Law and Economics, University of Chicago Press, vol. 38(1), pages 19-48, April.
  5. Cason, Timothy N & Gangadharan, Lata, 1998. "An Experimental Study of Electronic Bulletin Board Trading for Emission Permits," Journal of Regulatory Economics, Springer, vol. 14(1), pages 55-73, July.
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