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The impact of informational costs in quantity regulation of pollutants. The case of the European Emissions Trading Scheme

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  • Heindl, Peter

Abstract

There is extreme heterogeneity of firms regulated under the European Emissions Trading Scheme (EU ETS) in terms of emissions evels and employed technology. We present a model that shows that behavior of firms under quantity regulation can differ strongly, dependent on the characteristics of the firms when the assumption of full information is relaxed. If there are informational costs with regard to abatement options and costs, relatively small emitters and emitters with relatively complex technology will face a threshold for evaluating abatement options and costs. We compare the EU ETS to the US SO2 trading scheme and show that 'adjoining' markets to quantity regulation, supplying goods (i.e. abatement technology) or services (i.e. assistance in permit trading), play a crucial role to reduce transactions costs. Given high complexity of technology and/or strongly limited demand for certain technologies, markets will fail to provide appropriate assistance, generating efficiency losses. The presence of technological complexity and heterogeneous firms can have major consequences for the design of environmental regulation, when considering transaction costs.

Suggested Citation

  • Heindl, Peter, 2011. "The impact of informational costs in quantity regulation of pollutants. The case of the European Emissions Trading Scheme," ZEW Discussion Papers 11-040, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  • Handle: RePEc:zbw:zewdip:11040
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    References listed on IDEAS

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    1. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
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    3. Juan-Pablo Montero, 2009. "Market Power in Pollution Permit Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Special I).
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    5. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
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    8. Sandoff, Anders & Schaad, Gabriela, 2009. "Does EU ETS lead to emission reductions through trade? The case of the Swedish emissions trading sector participants," Energy Policy, Elsevier, vol. 37(10), pages 3967-3977, October.
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    10. Löschel, Andreas & Kiehl, Kerstin & Heindl, Peter & Lo, Vivien & Koschel, Henrike & Koesler, Simon, 2010. "KfW/ZEW CO2 Barometer 2010: Effizienzpotenziale des Emissionshandels noch nicht ausgeschöpft – Strategien und Management deutscher Unternehmen," KfW/ZEW-CO2-Barometer, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research, number 109794.
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    Cited by:

    1. Heindl, Peter & Löschel, Andreas, 2012. "Designing emissions trading in practice general considerations and experiences from the EU Emissions Trading Scheme (EU ETS)," ZEW Discussion Papers 12-009, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

    More about this item

    Keywords

    Quantity Regulation; Transaction Costs; Technological Complexity; Induced Technological Change; Emissions Trading;

    JEL classification:

    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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