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Intertemporal Links in Cap-and Trade Schemes

Author

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  • Aurelie Slechten

Abstract

I study the effects of intertemporal emission permits trading in a cap-and-trade scheme when firms' abatement investments have long-term effects. In a two-period general equilibrium model, firms make trading and investment decisions in each period to meet their caps. I compare equilibrium abatement levels and permit prices, with and without intertemporal trading. Intertemporal trading may reduce total abatement investments over the scheme. Without intertemporal trading, some investments in period 1 are entirely driven by second-period abatement needs; in this case, intertemporal trading may reduce investments in period 1 as some are substituted by intertemporal permit trading. Descriptive evidence from the EU Emissions Trading System (ETS) illustrates this potential effect. I also show that if the number of permits issued by the regulator is not equal to the socially optimal level of emissions, then banning intertemporal trading may reduce the social cost thanks to the long-term properties of investments.

Suggested Citation

  • Aurelie Slechten, 2011. "Intertemporal Links in Cap-and Trade Schemes," Working Papers ECARES ECARES 2011-014, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/90863
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. David Newbery, 2016. "Policies for decarbonizing a liberalized power sector," Cambridge Working Papers in Economics 1614, Faculty of Economics, University of Cambridge.
    2. Oskar Lecuyer & Adrien Vogt-Schilb, 2013. "Assessing and ordering investments in polluting fossil-fueled and zero-carbon capital," CIRED Working Papers hal-00850680, HAL.
    3. Vogt-Schilb, Adrien & Meunier, Guy & Hallegatte, Stéphane, 2018. "When starting with the most expensive option makes sense: Optimal timing, cost and sectoral allocation of abatement investment," Journal of Environmental Economics and Management, Elsevier, vol. 88(C), pages 210-233.
    4. Rozenberg, Julie & Vogt-Schilb, Adrien & Hallegatte, Stephane, 2014. "Transition to clean capital, irreversible investment and stranded assets," Policy Research Working Paper Series 6859, The World Bank.
    5. Simon Quemin, 2016. "Intertemporal abatement decisions under ambiguity aversion in a cap and trade," Working Papers 1604, Chaire Economie du climat.
    6. Lecuyer, Oskar & Vogt-Schilb, Adrien, 2014. "Optimal transition from coal to gas and renewable power under capacity constraints and adjustment costs," Policy Research Working Paper Series 6985, The World Bank.
    7. 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.
    8. Oskar Lecuyer & Adrien Vogt-Schilb, 2014. "Optimal Transition from Coal to Gas and Renewable Power under Capacity Constraints and Adjustment Costs," Working Papers hal-01057241, HAL.

    More about this item

    Keywords

    cap-and-trade schemes; emission trading; abatements; investment; banking; borrowing;

    JEL classification:

    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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