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Emissions Trading and Intersectoral Dynamics: Absolute versus Relative Design Schemes

  • de, Vries Frans
  • Dijkstra, Bouwe R
  • McGinty, Matthew

This paper examines the interdependence between imperfect competition and emis- sions trading in a two-sector (clean and dirty) economy. We compare the welfare implica- tions of an absolute cap-and-trade scheme (permit trading) with a relative intensity-based scheme (credit trading). We nd unambiguously more clean rms in the long run under credit trading. However, neither emissions trading con guration creates the rst-best out- come: there are too few (many) clean rms under permit (credit) trading. Permit trading dominates credit trading in terms of overall welfare at the long run equilibrium, except when policy is relatively lenient. It is also demonstrated that stricter policy does not necessarily induce the clean sector to grow relative to the dirty sector and we determine under what conditions this holds.

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File URL: http://hdl.handle.net/1893/3180
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Paper provided by University of Stirling, Division of Economics in its series Stirling Economics Discussion Papers with number 2011-15.

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Date of creation: Jul 2011
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Handle: RePEc:stl:stledp:2011-15
Contact details of provider: Postal: Division of Economics, University of Stirling, Stirling, Scotland FK9 4LA
Phone: +44 (0)1786 467473
Fax: +44 (0)1786 467469
Web page: http://www.econ.stir.ac.uk/

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  1. Fischer, Carolyn, 2003. "Combining Rate-Based and Cap-and-Trade Emissions Policies," Discussion Papers dp-03-32, Resources For the Future.
  2. Donald N. Dewees, 2000. "Emissions Trading: ERCs or Allowances," Working Papers dewees-00-01, University of Toronto, Department of Economics.
  3. Stavins, Robert N., 2003. "Experience with market-based environmental policy instruments," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 9, pages 355-435 Elsevier.
  4. Suzi Kerr & Richard G. Newell, 2003. "Policy-Induced Technology Adoption: Evidence from the U.S. Lead Phasedown," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 317-343, 09.
  5. Jan-Tjeerd Boom & Bouwe Dijkstra, 2009. "Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading Under Perfect and Imperfect Competition," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 44(1), pages 107-136, September.
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