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The Temporal Efficiency of SO2 Emissions Trading

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  • Ellerman, A.D.
  • Juan-Pablo Montero

Abstract

This paper provides an empirical evaluation of the temporal efficiency of the US Acid Rain Program, which implemented a nationwide market for trading and banking sulphur dioxide (SO2) emission allowances. We first develop a model of efficient banking and select appropriate parameter values. Then we use aggregate data from the first seven years of the Acid Rain Program to access the temporal efficiency of the observed banking behaviour. We find that banking has been surprisingly efficient and we discuss why this finding disagrees with the common perception of excessive banking in this program.

Suggested Citation

  • Ellerman, A.D. & Juan-Pablo Montero, 2002. "The Temporal Efficiency of SO2 Emissions Trading," Cambridge Working Papers in Economics 0231, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:0231
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    File URL: http://www.econ.cam.ac.uk/electricity/publications/wp/ep13.pdf
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    References listed on IDEAS

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    2. Margaret E. Slade & Henry Thille, 1997. "Hotelling Confronts CAPM: A Test of the Theory of Exhaustible Resources," Canadian Journal of Economics, Canadian Economics Association, vol. 30(3), pages 685-708, August.
    3. Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2005. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521023894, Enero-Abr.
      • Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2000. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521660839, June.
    4. Farrow, Scott, 1985. "Testing the Efficiency of Extraction from a Stock Resource," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 452-487, June.
    5. Kling, Catherine L. & Rubin, Jonathan, 1993. "Emission Saved is an Emission Earned: An Empirical Study of Emission Banking (An)," Staff General Research Papers Archive 1579, Iowa State University, Department of Economics.
    6. Rubin Jonathan & Kling Catherine, 1993. "An Emission Saved Is an Emission Earned: An Empirical Study of Emission Banking for Light-Duty Vehicle Manufacturers," Journal of Environmental Economics and Management, Elsevier, vol. 25(3), pages 257-274, November.
    7. 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.
    8. Cronshaw, Mark B & Brown-Kruse, Jamie, 1996. "Regulated Firms in Pollution Permit Markets with Banking," Journal of Regulatory Economics, Springer, vol. 9(2), pages 179-189, March.
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    Citations

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    Cited by:

    1. Emilie Alberola & Julien Chevallier, 2009. "European Carbon Prices and Banking Restrictions: Evidence from Phase I (2005-2007)," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 51-80.
    2. Schleich, Joachim & Ehrhart, Karl-Martin & Hoppe, Christian & Seifert, Stefan, 2006. "Banning banking in EU emissions trading?," Energy Policy, Elsevier, vol. 34(1), pages 112-120, January.
    3. Juan-Pablo Montero, 2004. "Markets for environmental protection: design and performance incomplete enforcement," Estudios de Economia, University of Chile, Department of Economics, vol. 31(1 Year 20), pages 79-99, June.
    4. Matti Liski & Juan-Pablo Montero, 2005. "A Note on Market Power in an Emission Permits Market with Banking," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 31(2), pages 159-173, June.
    5. Julien Chevallier, 2009. "Intertemporal Emissions Trading and Market Power: A Dominant Firm with Competitive Fringe Model," Working Papers halshs-00388207, HAL.
    6. Julien Chevallier, 2007. "A differential game of intertemporal emissions trading with market power," Working Papers hal-04139220, HAL.
    7. Hitaj, Claudia & Stocking, Andrew, 2016. "Market efficiency and the U.S. market for sulfur dioxide allowances," Energy Economics, Elsevier, vol. 55(C), pages 135-147.
    8. John Stranlund & Christopher Costello & Carlos Chávez, 2005. "Enforcing Emissions Trading when Emissions Permits are Bankable," Journal of Regulatory Economics, Springer, vol. 28(2), pages 181-204, September.
    9. Karl-Martin Ehrhart & Christian Hoppe & Joachim Schleich & Stefan Seifert, 2005. "The role of auctions and forward markets in the EU ETS: counterbalancing the cost-inefficiencies of combining generous allocation with a ban on banking," Climate Policy, Taylor & Francis Journals, vol. 5(1), pages 31-46, January.
    10. Newell, Richard G. & Sanchirico, James N. & Kerr, Suzi, 2005. "Fishing quota markets," Journal of Environmental Economics and Management, Elsevier, vol. 49(3), pages 437-462, May.
    11. Juan-Pablo Montero, 2002. "Testing the Efficiency of a Tradeable Permits Market," Documentos de Trabajo 224, Instituto de Economia. Pontificia Universidad Católica de Chile..
    12. Sebastian Goers & Alexander Wagner & Jürgen Wegmayr, 2010. "New and old market-based instruments for climate change policy," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 12(1), pages 1-30, June.
    13. Li, Shoude & Gu, Mengdi, 2012. "The effect of emission permit trading with banking on firm's production–inventory strategies," International Journal of Production Economics, Elsevier, vol. 137(2), pages 304-308.
    14. Ma-Lin Song & Wei Zhang & Xiao-Ming Qiu, 2015. "Emissions trading system and supporting policies under an emissions reduction framework," Annals of Operations Research, Springer, vol. 228(1), pages 125-134, May.
    15. Emilie Alberola & Julien Chevallier, 2007. "European carbon prices and banking restrictions: evidence from phase I (2005-2007)," Working Papers hal-04139202, HAL.
    16. Li, Shoude, 2013. "Emission permit banking, pollution abatement and production–inventory control of the firm," International Journal of Production Economics, Elsevier, vol. 146(2), pages 679-685.
    17. Julien Chevallier, 2009. "Intertemporal Emissions Trading and Allocation Rules: Gainers, Losers and the Spectre of Market Power," Working Papers halshs-00124713, HAL.

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    Keywords

    emissions trading; banking; acid rain; tradable permits;
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