IDEAS home Printed from https://ideas.repec.org/p/isu/genres/37453.html
   My bibliography  Save this paper

Cap and Trade under Transactions Costs and Factor Irreversibility

Author

Listed:
  • Singh, Rajesh
  • Weninger, Quinn

Abstract

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.

Suggested Citation

  • Singh, Rajesh & Weninger, Quinn, 2014. "Cap and Trade under Transactions Costs and Factor Irreversibility," Staff General Research Papers Archive 37453, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:37453
    as

    Download full text from publisher

    File URL: http://www2.econ.iastate.edu/papers/p17453-2014-03-29.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Zhao, Jinhua, 2003. "Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges," Journal of Public Economics, Elsevier, vol. 87(12), pages 2765-2789, December.
    2. 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.
    3. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    4. Laura Onofri, 2008. "Testing Williamson's theory on transaction-specific governance structures: Evidence from electricity markets," Journal of Applied Economics, Universidad del CEMA, vol. 11, pages 355-372, November.
    5. Yang, Ming & Blyth, William & Bradley, Richard & Bunn, Derek & Clarke, Charlie & Wilson, Tom, 2008. "Evaluating the power investment options with uncertainty in climate policy," Energy Economics, Elsevier, vol. 30(4), pages 1933-1950, July.
    6. 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.
    7. Naegele, Helene, 2015. "Offset Credits in the EU Emissions Trading System : A Firm-Level Evaluation of Transaction Costs," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112817, Verein für Socialpolitik / German Economic Association.
    8. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    9. McCann, Laura, 2013. "Transaction costs and environmental policy design," Ecological Economics, Elsevier, vol. 88(C), pages 253-262.
    10. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
    11. Färe, Rolf & Grosskopf, Shawna & Pasurka,, Carl A., 2013. "Tradable permits and unrealized gains from trade," Energy Economics, Elsevier, vol. 40(C), pages 416-424.
    12. Tim Coelli & Ludwig Lauwers & Guido Huylenbroeck, 2007. "Environmental efficiency measurement and the materials balance condition," Journal of Productivity Analysis, Springer, vol. 28(1), pages 3-12, October.
    13. Lata Gangadharan, 2000. "Transaction Costs in Pollution Markets: An Empirical Study," Land Economics, University of Wisconsin Press, vol. 76(4), pages 601-614.
    14. 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.
    15. 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.
    16. Rajesh Singh & Quinn Weninger, 2017. "Cap-and-trade under transactions costs and factor irreversibility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(2), pages 357-407, August.
    17. Pethig, Rudiger, 2006. "Non-linear production, abatement, pollution and materials balance reconsidered," Journal of Environmental Economics and Management, Elsevier, vol. 51(2), pages 185-204, March.
    18. Cason, Timothy N & Gangadharan, Lata, 2003. "Transactions Costs in Tradable Permit Markets: An Experimental Study of Pollution Market Designs," Journal of Regulatory Economics, Springer, vol. 23(2), pages 145-165, March.
    19. Frédéric Branger & Oskar Lecuyer & Philippe Quirion, 2015. "The European Union Emissions Trading Scheme: should we throw the flagship out with the bathwater?," Post-Print hal-01137875, HAL.
    20. Blyth, William & Bradley, Richard & Bunn, Derek & Clarke, Charlie & Wilson, Tom & Yang, Ming, 2007. "Investment risks under uncertain climate change policy," Energy Policy, Elsevier, vol. 35(11), pages 5766-5773, November.
    21. 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)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rajesh Singh & Quinn Weninger, 2017. "Cap-and-trade under transactions costs and factor irreversibility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(2), pages 357-407, August.

    More about this item

    Keywords

    Cap-and-trade regulation; Transactions costs; permit trade; capacity and permit utilization.;

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: http://edirc.repec.org/data/deiasus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.