Cap-and-Trade Programs under Delayed Compliance
Previous analyses of cap-and-trade programs regulating carbon emissions assumed that firms must surrender permits as they pollute. If so, then the price of permits may remain constant over measurable intervals if the government injects additional permits at a ceiling price or may even collapse if more permits are injected through an auction. However, no cap-and-trade program actually requires continual compliance. The three federal bills and California's AB-32, for example, instead require that firms surrender permits only periodically to cover their cumulative emissions since the last compliance period. Anticipated injections of additional permits during the compliance period should have different effects than under continual compliance. We develop a methodology for analyzing the effects of such permit injections. Using it, we explain why sales provisions of one federal bill might generate a speculative attack in the permit market and why provisions of AB-32 may undermine the very existence of an equilibrium.
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