Emissions Trading with Shares and Coupons when Control over Discharges Is Uncertain

Two important decisions in designing markets for tradable emissions permits are whether to allow banking of permits (coupons) and whether to allow trading in entitlements to future permits (shares). Banking is predicted to reduce price instability when firms trade in a reconciliation market after the quantity of emissions has been determined. Tradable shares are a common feature in proposals for emissions trading in Canada. We conduct a laboratory experiment to investigate how bankable coupons and tradable shares affect efficiency and prices under uncertainty. Cognitive demands on the subjects are reduced by computerized advice on the optimal allocation of coupons across periods and the implied marginal values of coupons and shares. Banking, share trading, and uncertainty conditions are introduced in a complete factorial design with three observations per cell. High efficiencies are observed across all treatments. Uncertainty in the control of emissions leads to substantial price instability when banking is not allowed. Banking virtually eliminates the instability, but reduces the efficiency of the market institution. Share trading reduces trading volumes, increases price stability, and improves efficiency.     

Enforcement and price controls in emissions trading

This paper examines how enforcement affects the structure and performance of emissions trading programs with price controls under uncertainty about firms' abatement costs. The analysis highlights how an enforcement strategy can cause abatement-cost risk to be transmitted to enforcement costs via the price of permits. When this occurs, accommodating the effect of abatement-cost risk with an optimal policy results in higher expected emissions and lower expected permit price than their second-best optimal values. However, it is possible to design an enforcement strategy that shields enforcement costs from abatement-cost risk by tying sanctions directly to permit prices. This enforcement strategy stabilizes enforcement effort, the optimal permit supply and price controls are independent of enforcement costs, and the policy produces the second-best optimal outcome.     

Price controls and banking in emissions trading: An experimental evaluation

We present results from laboratory emissions markets designed to investigate the effects of price controls and permit banking on limiting permit price risk. While both instruments reduce between-period price volatility and within-period price dispersion, combining price controls and permit banking yields important benefits. Banking alone produces high permit prices in earlier periods that fall over time, but the combined policy produces lower initial prices and lower volatility. However, banking, price controls, and the combination all produce higher between-period emissions volatility. Hence, for emissions markets that seek to control flow pollutants with strictly convex damages, efforts to limit permit price risk can result in higher expected damage.     

Non-compliance and the quota price in an ITQ fishery

This paper examines the effects of non-compliance on quota demands and the equilibrium quota price in an ITQ fishery. I show that whereas lower quota prices are implied unambiguously by expected penalties which are a function of the absolute violation size, the expectation of penalties based upon relative violations of quota demands can, under certain conditions, produce higher quota prices than in a compliant quota market. If there are both compliant and non-compliant firms in the fishery, the result would then be a shift in quota demand from compliant to non-compliant firms, rather than the reverse. The findings are generally applicable to quota markets in other industries, including pollution permit markets.     

Thin versus Thick CO2 Market

The idea that trading is more costly the thinner the market is is common in most studies of market exchange with frictions. Surprisingly, this element is lacking from previous attempts to allow for frictions in pollution permit markets. This paper considers a CO₂ cap-and-trade model where trading costs develop endogenously as a function of the market size. The pre-trade allocation of permits determines whether the market size can be strongly influenced by expectations that have a role because of adjustment costs. The pre-trade allocation also sets preconditions for endogenously vanishing trading costs and thus has nonstandard effects on long-run trading levels and market allocations.     

An experimental analysis of compliance in dynamic emissions markets

Two important design elements for emission trading programs are whether and to what extent firms are able to bank emissions permits, and how these programs are to be enforced. In this paper we present results from laboratory emissions markets designed to investigate enforcement and compliance when these markets allow permit banking. Banking is motivated by a decrease in the aggregate permit supply in the middle of multi-period trading sessions. Consistent with theoretical insights, our experiments suggest that high permit violation penalties have little deterrence value in dynamic emissions markets, and that the main challenge of enforcing these programs is to motivate truthful self-reports of emissions.     

An experimental analysis of compliance in dynamic emissions markets

Two important design elements for emission trading programs are whether and to what extent firms are able to bank emissions permits, and how these programs are to be enforced. In this paper we present results from laboratory emissions markets designed to investigate enforcement and compliance when these markets allow permit banking. Banking is motivated by a decrease in the aggregate permit supply in the middle of multi-period trading sessions. Consistent with theoretical insights, our experiments suggest that high permit violation penalties have little deterrence value in dynamic emissions markets, and that the main challenge of enforcing these programs is to motivate truthful self-reports of emissions.     

Unintended consequences of price controls: An application to allowance markets

Price controls established in a cap-and-trade allowance market are intended to reduce cost uncertainty by constraining allowance prices between a ceiling and floor; however, they could provide opportunities for strategic actions by firms that would lower government revenue and increase emissions. In particular, when the ceiling price is supported by introducing new allowances into the market, firms could choose to buy allowances at the ceiling price, regardless of the prevailing market price, in order to lower the equilibrium price of all allowances. Those purchases could either be transacted by firms intending to manipulate the market price or be induced through the introduction of inaccurate information about the cost of emissions abatement. Theory and simulations using allowance elasticity estimates for U.S. firms suggest that the manipulation could be profitable under the stylized setting and assumptions evaluated in the paper, although in practice many other conditions will determine its use.     

Optimal pollution permit endowments in markets with endogenous emissions

In a permit market with endogenous emissions, both firms and citizens purchase permits. Presented here are static and dynamic models of pollution permit markets with endogenous emissions. The optimal permit endowments are characterized when the regulator faces uncertainty about damages and uncertainty about the severity of the citizens’ collective action problem. Due to the possibility of learning over time, the regulator issues a larger number of permits in the first period of the dynamic model than in the static model.     

Procrastinating reform: The impact of the market stability reserve on the EU ETS

We study the impact of the market stability reserve (MSR) on price and emission paths of the EU ETS. From 2019 onwards, the MSR will adjust the number of allowances auctioned as a function of the size of the surplus, i.e. in times of a large surplus it shifts the issue date of allowances into the future. In a perfectly competitive allowance market the MSR only affects price and emission paths if the baseline equilibrium becomes unfeasible. If the MSR is binding, prices increase in the short run but drop in the medium run relative to the baseline. The MSR increases price variability if uncertainty over future allowance demand is resolved while there is a surplus. The long run cap is unaffected by both the MSR and overlapping climate policies. This contrasts the EU׳s objectives of improving the resilience of the EU ETS and increasing synergies with overlapping climate policies.     

A Model of Intertemporal Emission Trading, Banking, and Borrowing

This paper provides a general treatment of emission trading, banking, and borrowing in an intertemporal, continuous-time model. Using optimal-control theory, the decentralized behavior of firms is shown to lead to the least-cost solution attainable under joint-cost minimization. Explicit solutions for the time paths of emissions and permit prices are derived when firms are allowed to both bank and borrow and when firms are only allowed to bank emission permits. The policy implications of emission banking and borrowing are discussed.     

Incentives and prices in an emissions trading scheme with updating

Emissions trading schemes where allocations are based on updated baseline emissions give firms less incentive to reduce emissions for a given quota (or allowance) price. Nevertheless, according to Böhringer and Lange [On the design of optimal grandfathering schemes for emission allowances, Europ. Econ. Rev. 49 (2005) 2041–2055], such allocation schemes are cost-effective if the system is closed and allocation rules are identical across firms. In this paper, we show that the cost-effective solution may be infeasible if marginal abatement costs grow too fast. Moreover, if a price cap or banking/borrowing is introduced, the abatement profile is no longer the same as in the case with an auction (or lump-sum allocation). In addition, we show that with allocation based on updated emissions, the quota price will always exceed marginal abatement costs, possibly misguiding policy makers and investors about abatement costs. Numerical simulations indicate that the quota price most likely will be several times higher than marginal abatement costs, unless a significant share of allowances is auctioned.     

中国碳排放权交易市场运行状况、问题和对策研究

排污权交易理论的提出解决了发展经济与治理环境不能并行的难题。以欧盟碳排权交易体系为标志的世界范围内的碳排放权交易市场已逐步形成,碳排放权交易的实施减缓了全球气候变暖的速度,改善了人类赖以生存的生态环境,从长期看也促进了该政策实施地经济的发展。CDM机制下拥有世界上最大碳供应量的中国在国际碳排放权交易市场上却一直处于价格接受者的地位,辛苦的减排成果却给国外买家创造了丰厚的利润。国内有关碳排放权交易的理论研究与交易市场的试点运行早已在前几年展开,目前也取得了较大的进展。全国7个碳交易试点运行市场在2014年6月达到了交易的高峰期,交易量达到285.9227万吨,交易额达到了16398.2325万元。另据国家发改委统计,截至2014年10月,7个碳交易试点省市共完成交易1375万吨二氧化碳,累计成交金额超过5亿元人民币。然而这样的交易额对蕴含巨大减排潜力的中国而言远远不足,中国的碳排放权交易市场还不够成熟,试点地区的碳交易市场也比较分散,尚未形成全国统一的排放权交易市场。碳排放企业参与碳交易市场的积极性不足,导致碳排放配额流动性过低,市场交易量较低,交易市场的活跃度不够,这对想要在2016年运行全国统一性碳排放权交易市场的中国来说是一重大挑战。文章首先分析对比了国内外排污权交易市场的运行机制与现状,其次对目前中国7大碳排放交易试点地区的市场成交额与成交量等交易状况基础进行分析,找出碳排放交易市场发展缓慢的根本原因,结合碳排放权金融市场的发展与碳金融衍生产品的创新,为中国在国际排放权市场上赢得话语权以及争取是“十三五”期间构建相对成熟稳定的国内排放权交易市场的给出建议。     

Stochastic pollution, costly sanctions, and optimality of emission permit banking

This paper identifies a new economic motive for pollution regulations that allow polluting firms to bank and borrow emission permits over time. When aggregate pollution is stochastic, an intertemporal permit trading regime can provide firms with efficient incentives for pollution abatement without the need for costly government enforcement actions that would otherwise be required.     

Jointly produced exhaustible resources

Natural resources are often produced jointly from composite ores, which in turn are extracted from fixed reserve endowments. In this paper market behavior is examined for such resources, and it is shown how the price of each resource will depend on its demand, and the demands and storage costs for the other resources present in the ore. The measurement of resource scarcity is discussed and the effects of uncertainty over future resource demands are examined. It is shown that the competitive market will still extract, produce, and store at socially optimal rates if firms are risk neutral and the average cost of storage is constant. Policy implications are noted, particularly with reference to government stockpiling programs.     

Terminating links between emission trading programs

Links between emission trading programs are not immutable, as highlighted by New Jersey׳s exit from the Regional Greenhouse Gas Initiative in 2011. This raises the question of what to do with existing permits that are banked for future use—choices that have consequences for market behavior in advance of, or upon speculation about, delinking. We consider two delinking policies. One differentiates banked permits by origin, the other treats banked permits the same. We describe the price behavior and relative cost-effectiveness of each policy. Treating permits differently generally leads to higher costs, and may lead to price divergence, even with only speculation about delinking.     

Environmental policy à la carte: Letting firms choose their regulation

Under uncertainty, the optimal choice between price and quantity instruments depends on the technology of the regulated firms, which is often private information. We consider an environmental policy that delegates the prices-versus-quantities decision to the firms by offering them the choice between an emissions tax and permit trading. Such an approach is currently used in Swiss climate policy. We provide a detailed characterization of the optimal policy and show that this approach reduces expected social costs compared to a pure tax or permit-trading regime. We demonstrate that an optimal allocation of firms to instruments can be achieved despite substantial informational constraints, and that all firms gain from the introduction of the instrument choice compared to optimally designed single-instrument policies. Furthermore, we discuss the conditions under which this approach is likely to be preferable to a hybrid regulation.     

The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments

This paper presents a model of the collective emission permit banking behavior of electricity-generating units affected by Title IV of the Clean Air Act Amendments of 1990. A rigorous treatment of the constraint that pollution permits cannot be borrowed from future allocations is introduced. This approach enables an analysis of the impact of future changes in electricity demand, regulations, and technologies on the present permit price and emissions level. The effect of uncertainty on the banking behavior is also explored.     

Alternative policy instruments under uncertainty: A programming model of toxic pollution control

This paper presents the results of a programming model which examines the relative performance of different regulatory regimes under uncertainty in controlling toxic wastes discharged by industry to a central treatment plant when the central is subject to threshold-type losses in treatment performance. Four regulatory regimes are examined: non-market quantity, price, marketable permit, and mixed price-quantity. The theoretical framework of the model is based on the analysis of prices vs quantities by Weitzman in 1974 and its extension to the case of a discontinuous threshold effect. The data used are based on the situation of Bridgeport, Connecticut, which has a number of metal finishing firms.