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Modeling of Emission Allowance Markets: A Literature Review

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  • Vincent Bertrand

Abstract

This paper reviews the development of emission trading models from the earliest to recent contributions. First, we introduce the economics of pollution control and the origins of emission trading. We give a brief description of policy instruments for the control of pollution, and explain why economic instruments (Pigouvian tax and emission trading) produce better results than “command-and-control” approaches. Second, we review several papers on modeling of emission trading systems, with a focus on dynamic models in case of perfect competition. We begin with the earliest static models, investigating a number of factor that can affect the effectiveness of emission trading (e.g. market power, transaction-costs, political pressures, etc). Next, we present dynamic models of permit markets, analysing questions such as banking/borrowing, relationship between spot and future markets, exogenous factors influencing the marginal abatement cost, etc. Finally, we end the paper with recent studies that model the main features of the European Emission Trading Scheme (EU ETS) in a dynamic framework with stochastic emissions.

Suggested Citation

  • Vincent Bertrand, 2013. "Modeling of Emission Allowance Markets: A Literature Review," Working Papers 1304, Chaire Economie du climat.
  • Handle: RePEc:cec:wpaper:1304
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    References listed on IDEAS

    as
    1. Innes, Robert, 2003. "Stochastic pollution, costly sanctions, and optimality of emission permit banking," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 546-568, May.
    2. Robert W. Hahn, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 753-765.
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    4. Julien Chevallier, 2012. "Banking And Borrowing In The Eu Ets: A Review Of Economic Modelling, Current Provisions And Prospects For Future Design," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 157-176, February.
    5. Hintermann, Beat, 2010. "Allowance price drivers in the first phase of the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 43-56, January.
    6. Luca Taschini, 2010. "Environmental Economics and Modeling Marketable Permits," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 17(4), pages 325-343, December.
    7. Seifert, Jan & Uhrig-Homburg, Marliese & Wagner, Michael, 2008. "Dynamic behavior of CO2 spot prices," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 180-194, September.
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    10. Springer, Urs, 2003. "The market for tradable GHG permits under the Kyoto Protocol: a survey of model studies," Energy Economics, Elsevier, vol. 25(5), pages 527-551, September.
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    14. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
    15. Schennach, Susanne M., 2000. "The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 189-210, November.
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    Cited by:

    1. Koch, Nicolas & Fuss, Sabine & Grosjean, Godefroy & Edenhofer, Ottmar, 2014. "Causes of the EU ETS price drop: Recession, CDM, renewable policies or a bit of everything?—New evidence," Energy Policy, Elsevier, vol. 73(C), pages 676-685.
    2. Friedrich, Marina & Mauer, Eva-Maria & Pahle, Michael & Tietjen, Oliver, 2020. "From fundamentals to financial assets: the evolution of understanding price formation in the EU ETS," EconStor Preprints 196150, ZBW - Leibniz Information Centre for Economics.
    3. Bertrand, Vincent, 2014. "Carbon and energy prices under uncertainty: A theoretical analysis of fuel switching with heterogenous power plants," Resource and Energy Economics, Elsevier, vol. 38(C), pages 198-220.
    4. Xu, Li & Deng, Shi-Jie & Thomas, Valerie M., 2016. "Carbon emission permit price volatility reduction through financial options," Energy Economics, Elsevier, vol. 53(C), pages 248-260.
    5. Vincent Bertrand, 2013. "Carbon and energy prices under uncertainty: A theoretical analysis of fuel switching with non-equally efficient power plants," Working Papers 1309, Chaire Economie du climat.
    6. Raphaël Trotignon & Pierre-André Jouvet & Boris Solier & Simon Quemin & Jérémy Elbeze, 2015. "European carbon market: lessons on the impact of a market stability reserve using the Zephyr model," Working Papers 1511, Chaire Economie du climat.

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    Keywords

    Emission Trading; EU ETS; Partial Equilibrium Modeling;
    All these keywords.

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