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.     

Modeling the impact of uncertainty in emissions trading markets with bankable permits

The various forms of uncertainty that firms may face in bankable emission permit trading markets will affect firms’ decision making as well as their market performance. This research explores the effect of increased uncertainty over future input costs and output prices on the temporal distribution of emission. In a dynamic programming setting, the permit price is a convex function of stochastic prices of coal and electricity. Increased uncertainty about future market conditions increases the expected permit price and causes a risk neutral firm to reduce ex ante emissions in order to smooth out marginal abatement costs over time. Finally, safety valves, both low-side and high-side, are suggested to reduce the impact of uncertainty in bankable emission trading markets.     

Linking permit markets multilaterally

We formally study the determinants, magnitude and distribution of efficiency gains generated in multilateral linkages between permit markets. We provide two novel decomposition results for these gains, characterize individual preferences over linking groups and show that our results are largely unaltered with strategic domestic emissions cap selection or when banking and borrowing are allowed. Using the Paris Agreement pledges and power sector emissions data of five countries which all use or considered using both emissions trading and linking, we quantify the efficiency gains. We find that the computed gains can be sizable and are split roughly equally between effort and risk sharing.     

Tying enforcement to prices in emissions markets: An experimental evaluation

We present results from laboratory emissions permit markets designed to investigate the transmission of abatement cost risk to firms' compliance behavior and regulatory enforcement strategies. With a fixed expected marginal penalty, abatement cost shocks produced significant violations and emissions volatility as predicted. Tying the monitoring probability to average permit prices effectively eliminated noncompliance, but transmitted abatement cost risk to monitoring effort. Tying the penalty to average prices reduced violations, but did not eliminate them. Some individuals in these treatments sold permits at low prices, presumably in an attempt to weaken enforcement. While tying sanctions directly to prevailing permit prices has theoretical and practical advantages over tying monitoring to prices, our results suggest that tying sanctions to prices may not be as effective as predicted without additional modifications.     

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.     

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。     

Economic Growth and Biodiversity Loss in an Age of Tradable Permits

Abstract:  Tradable permits are increasingly becoming part of environmental policy and conservation programs. The efficacy of tradable permit schemes in addressing the root cause of environmental decline—economic growth—will not be achieved unless the schemes cap economic activity based on ecological thresholds. Lessons can be learned from the largest tradable permit scheme to date, emissions trading now being implemented with the Kyoto Protocol. The Kyoto Protocol caps neither greenhouse gas emissions at a level that will achieve climate stability nor economic growth. If patterned after the Kyoto Protocol, cap-and-trade schemes for conservation will not ameliorate biodiversity loss either because they will not address economic growth. In response to these failures to cap economic growth, professional organizations concerned about biodiversity conservation should release position statements on economic growth and ecological thresholds. The statements can then be used by policy makers to infuse these positions into the local, national, and international environmental science-policy process when these schemes are being developed. Infusing language into the science-policy process that calls for capping economic activity based on ecological thresholds represents sound conservation science. Most importantly, position statements have a greater potential to ameliorate biodiversity loss if they are created and released than if this information remains within professional organizations because there is the potential for these ideas to be enacted into law and policy.     

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.     

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.     

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.     

Stochastic Pollution, Permits, and Merger Incentives

Pollution permit regulations introduce nonlinearities into the objective function of a polluting firm. We develop a microeconomic model to show the effects these nonlinearities might have upon firm decisions when emissions are stochastic. Under perfect competition the fraction of planned pollution covered by permits is shown to be separable from planned production. We also demonstrate that permit management incentives may motivate a merger of otherwise independent firms. Incentives to petition for “bubble” coverage are also considered. The model is studied under risk neutrality and risk aversion. Imperfectly competitive situations in the output and permit markets are also analyzed.     

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.     

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.     

天津市排污权交易评估与分析

在简要介绍天津市排污权交易试点的开展历程与现状的基础上,对天津市排污交易试点进行了评估。分析了排污交易试点过程中存在的主要问题,即排污权交易难以为环境管理服务,其执行状况与实施初衷不完全相符,基础数据的现状尚不支持交易的有效进行,交易跟踪系统尚不健全,初始排污权分配技术方法不成熟。针对以上问题,对＂十二五＂期间天津市排污交易试点开展提出了建议。     

Oligopoly meets oligopsony: The case of permits

This paper derives market equilibria (in demand functions and in bidding strategies) between oligopolists and oligopsonists in a market with intermediates and no competition in final markets. To the best of my knowledge, this theme has not been explored, despite two observations: Firstly, the commonly applied framework of non-competitive and competitive fringe firms has implausible properties for the limit of purely strategic players. Secondly, real world cases correspond at least potentially to such strategic interactions, e.g., non-competitive players selling and buying permits (CO₂ and SO₂). The major implications are that these non-competitive markets are characterized by a kind of double marginalization (on the demand and the supply side) resulting in too little trade and wrong price signals.     

Cars on crutches: How much abatement do smog check repairs actually provide?

Not as much abatement as has been presumed. Smog check programs aim to curb tailpipe emissions from in-use vehicles by requiring repairs whenever emissions, measured at regular time intervals, exceed a certain threshold. Using data from California, we estimate that on average 41% of the initial emissions abatement from repairs is lost by the time of the subsequent inspection, normally two years later. Our estimates imply that the cost per pound of pollution avoided is an order of magnitude greater for smog check repairs than alternative policies such as new-vehicle standards or emissions trading among industrial point sources.     

Economics of additionality for environmental services from agriculture

We present a model of additionality for offsets sold from agriculture to industrial sector sources regulated by cap-and-trade. We consider a potential policy where agricultural sources would not be covered by cap-and-trade requirements but would be eligible to receive offsets whenever their emissions fall below a policy-specified baseline, and would not be penalized for emissions above their baseline. Major results are: (1) The optimal baseline should be set above the average counterfactual emissions of participating farms, an unexpected result that has been missing from the literature. (2) The optimal trading ratio should be greater than one (a ton of offsets counts for less than a ton of covered emissions) even under emissions certainty. Previous research has justified such trading ratios by emissions uncertainty. (3) Emissions uncertainty does not justify a change in the baseline if the accompanying emissions model is unbiased. (4) An optimal combination of policies is to subsidize offsets and tighten the baseline relative to the no-subsidy case.     

天津市燃煤型热电企业初始碳核查方法初探

天津市开展初始碳核查旨在通过碳排放交易市场来控制当地的二氧化碳排放量,促进当地绿色低碳发展。以天津市燃煤型热电企业为初始碳核查对象,结合实际核查过程中遇到的"指南外"情况,探索一套适合于此类企业的碳核查方法,来准确核算其真实碳排放数据,为天津市碳排放交易市场及企业碳排放权配额分配的顺利开展奠定基础。     

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.