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Trading for the Future: Signaling in Permit Markets

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  • Bard Harstad
  • Gunnar S. Eskeland

Abstract

Tradable permits are celebrated as a political instrument since they allow (i) firms to equalize marginal abatement costs through trade and (ii) the government to distribute the burden of the policy in a politically fair and feasible way. These two concerns, however, conflict in a dynamic setting. Anticipating that high-cost firms will receive more permits in the future, firms purchase excessive amounts of permits to signal high costs. This raises the price above marginal costs and distorts abatements. In fact, it is better with non-tradable permits if the heterogeneity between the firms is small, if the (shadow) price for permits is large, and if the government redistributes permits frequently.

Suggested Citation

  • Bard Harstad & Gunnar S. Eskeland, 2006. "Trading for the Future: Signaling in Permit Markets," Discussion Papers 1429, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1429
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    Cited by:

    1. Eskeland, Gunnar S. & Mideksa, Torben K., 2008. "Transportation fuel use, technology and standards: The role of credibility and expectations," Policy Research Working Paper Series 4695, The World Bank.
    2. Michael Jakob & Kai Lessmann, 2012. "Signaling in international environmental agreements: the case of early and delayed action," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 12(4), pages 309-325, November.
    3. repec:wfo:wstudy:58133 is not listed on IDEAS
    4. Nabila Arfaoui & Eric Brouillat & Maïder Saint-Jean, 2015. "The Impact of REACH on Eco-Innovation: How Perception Misfits on Policy Stringency Matter," GREDEG Working Papers 2015-45, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    5. Ibanez, Marcela & Blackman, Allen, 2015. "Environmental and Economic Impacts of Growing Certified Organic Coffee in Colombia," Discussion Papers dp-15-02, Resources For the Future.
    6. Knut Rosendahl & Jon Strand, 2015. "Emissions Trading with Offset Markets and Free Quota Allocations," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 61(2), pages 243-271, June.
    7. Nabila Arfaoui & Eric Brouillat & Maïder Saint Jean, 2015. "Credibility of the REACH Regulation: Lessons Drawn from an ABM," WWWforEurope Working Papers series 92, WWWforEurope.
    8. Dallas Burtraw & Karen Palmer, 2008. "Compensation rules for climate policy in the electricity sector," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(4), pages 819-847.
    9. Zetterberg, Lars, 2014. "Benchmarking in the European Union Emissions Trading System: Abatement incentives," Energy Economics, Elsevier, vol. 43(C), pages 218-224.
    10. Pizer, William A. & Yates, Andrew J., 2015. "Terminating links between emission trading programs," Journal of Environmental Economics and Management, Elsevier, vol. 71(C), pages 142-159.
    11. Ambec, Stefan & Coria, Jessica, 2018. "Policy spillovers in the regulation of multiple pollutants," Journal of Environmental Economics and Management, Elsevier, vol. 87(C), pages 114-134.
    12. Sascha Kollenberg & Luca Taschini, 2015. "The European Union Emissions Trading System and the Market Stability Reserve: Optimal Dynamic Supply Adjustment," CESifo Working Paper Series 5380, CESifo Group Munich.
    13. Bao, Yue & Gao, Ziyou & Yang, Hai & Xu, Meng & Wang, Guangmin, 2017. "Private financing and mobility management of road network with tradable credits," Transportation Research Part A: Policy and Practice, Elsevier, vol. 97(C), pages 158-176.
    14. Strand, Jon, 2016. "Mitigation incentives with climate finance and treaty options," Energy Economics, Elsevier, vol. 57(C), pages 166-174.
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    16. Eskeland, Gunnar S. & Rive, Nathan A. & Mideksa, Torben K., 2012. "Europe’s climate goals and the electricity sector," Energy Policy, Elsevier, vol. 41(C), pages 200-211.
    17. Beat Hintermann, 2013. "Market Power in Emission Permit Markets: Theory and Evidence," CESifo Working Paper Series 4447, CESifo Group Munich.
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    More about this item

    Keywords

    Tradable permits; private information; signaling;

    JEL classification:

    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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