Cap and Trade under Transactions Costs and Factor Irreversibility
We study production capacity utilization and emission permit utilization in a model where firms jointly produce a valued good and an environmental bad, pollution. Firms are ex ante identical but experience random productivity shocks after factor employment. A regulator imposes a cap-and-trade policy to control pollution emissions. Trade in emission permits entails transactions costs which follow two specifications: constant per unit trading costs or fixed trading costs. Under constant per unit trading costs, the equilibrium outcome depends only on the total unit trading costs; the incidence of costs borne by buyers and sellers does not matter. Under fixed costs, both buyers' and sellers' costs matter. Under proportional costs permit trade always occurs, with either full or partial market clearing, as long as the total trading costs are below the permit trade surplus. With fixed costs, trade is either partial or non-existent. The implication is that firms fully utilize their production capacity for a range of proportional trading costs; capacity is never fully utilized under fixed costs. Under proportional costs, trade is impeded most, even with small costs, when the emission cap is either relatively high or low. There exists a non-monotonic relationship between the aggregate emissions cap and a lower bound for trading costs that obstruct or preclude trade. Under fixed costs, a similar relationship between emission cap and the cost threshold that precludes trade holds only if the output variance is exogenously fixed. Otherwise, the higher the emission cap the higher is this cost threshold. In contrast to proportional costs where capacity utilization decreases with productivity variance, the result is the opposite under fixed costs.
|Date of creation:||29 Mar 2014|
|Contact details of provider:|| Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070|
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Murty, Sushama & Russell, R. Robert, 2010.
"On modeling pollution-generating technologies,"
The Warwick Economics Research Paper Series (TWERPS)
931, University of Warwick, Department of Economics.
- Sushama Murty & R. Robert Russell & Steven B. Levkoff, 2011. "On modeling pollution-generating technologies," Discussion Papers 1101, Exeter University, Department of Economics.
- Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
- Singh, Rajesh & Weninger, Quinn, 2012. "Harvest Efficiency and Discards under Harvest Uncertainty and Trading Frictions," Staff General Research Papers Archive 35039, Iowa State University, Department of Economics.
- Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
- Färe, Rolf & Grosskopf, Shawna & Pasurka,, Carl A., 2013. "Tradable permits and unrealized gains from trade," Energy Economics, Elsevier, vol. 40(C), pages 416-424.
- Lata Gangadharan, 2000. "Transaction Costs in Pollution Markets: An Empirical Study," Land Economics, University of Wisconsin Press, vol. 76(4), pages 601-614.
- Murty, Sushama & Robert Russell, R. & Levkoff, Steven B., 2012. "On modeling pollution-generating technologies," Journal of Environmental Economics and Management, Elsevier, vol. 64(1), pages 117-135.
- Fare, Rolf & Grosskopf, Shawna & Noh, Dong-Woon & Weber, William, 2005. "Characteristics of a polluting technology: theory and practice," Journal of Econometrics, Elsevier, vol. 126(2), pages 469-492, June.
- Heindl, Peter, 2012. "Transaction costs and tradable permits: Empirical evidence from the EU emissions trading scheme," ZEW Discussion Papers 12-021, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:isu:genres:37453. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Curtis Balmer)
If references are entirely missing, you can add them using this form.