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When to Pollute, When to Abate? Intertemporal Permit Use in the Los Angeles NOx Market

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  • Stephen P. Holland
  • Michael Moore

Abstract

Intertemporal tradability allows an emissions market to reduce abatement costs. We study intertemporal trading of nitrogen oxides permits in the RECLAIM program in Southern California. A theoretical model captures the program's key intertemporal features: two overlapping permit cycles, two compliance cycles for facilities, and tradable permits. We characterize the competitive equilibrium; show that it is cost effective; and demonstrate the firms' incentive to delay abatement, i.e., to trade intertemporally. Using model extensions to explore market design issues, an arbitrage condition implies that the equilibrium is invariant to overlapping compliance cycles, but depends crucially on overlapping permit cycles. We empirically investigate intertemporal trading of permits using panel data on RECLAIM facilities for 1994-2006. Facilities undertake trading by using a considerable proportion of permits of the opposite cycle. We econometrically test two theoretical propositions -- delayed abatement and trading across cycles -- with a difference-in-differences estimator. The results neither contradict nor provide conclusive support of the theory.

Suggested Citation

  • Stephen P. Holland & Michael Moore, 2008. "When to Pollute, When to Abate? Intertemporal Permit Use in the Los Angeles NOx Market," NBER Working Papers 14254, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14254
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    Cited by:

    1. Holland, Stephen P. & Moore, Michael R., 2013. "Market design in cap and trade programs: Permit validity and compliance timing," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 671-687.
    2. Burtraw, Dallas & Szambelan, Sarah Jo, 2009. "U.S. Emissions Trading Markets for SO2 and NOx," Discussion Papers dp-09-40, Resources For the Future.
    3. Meredith Fowlie & Stephen P. Holland & Erin T. Mansur, 2012. "What Do Emissions Markets Deliver and to Whom? Evidence from Southern California's NOx Trading Program," American Economic Review, American Economic Association, vol. 102(2), pages 965-993, April.
    4. Moore, Michael R. & Lewis, Geoffrey McD. & Cepela, Daniel J., 2010. "Markets for renewable energy and pollution emissions: Environmental claims, emission-reduction accounting, and product decoupling," Energy Policy, Elsevier, vol. 38(10), pages 5956-5966, October.
    5. Makoto Hasegawa & Stephen Salant, 2015. "The Dynamics of Pollution Permits," Annual Review of Resource Economics, Annual Reviews, vol. 7(1), pages 61-79, October.
    6. Gabriel E. Lade & C.Y. Cynthia Lin Lawell & Aaron Smith, 2016. "Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard," Center for Agricultural and Rural Development (CARD) Publications 16-wp565, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    7. Thijs Jong & Oscar Couwenberg & Edwin Woerdman, 2013. "Does the EU ETS Bite? The Impact of Allowance Over-Allocation on Share Prices," RSCAS Working Papers 2013/54, European University Institute.
    8. Jong, Thijs & Couwenberg, Oscar & Woerdman, Edwin, 2014. "Does EU emissions trading bite? An event study," Energy Policy, Elsevier, vol. 69(C), pages 510-519.
    9. Beat Hintermann, 2017. "Market Power in Emission Permit Markets: Theory and Evidence from the EU ETS," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(1), pages 89-112, January.

    More about this item

    JEL classification:

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

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