Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading Under Perfect and Imperfect Competition |
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Authors: | Jan-Tjeerd Boom Bouwe R Dijkstra |
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Institution: | (1) Systems Research Institute, Polish Academy of Sciences, Newelska 6, Warsaw, 01-447, Poland |
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Abstract: | This paper compares emissions trading based on a cap on total emissions (permit trading) and on relative standards per unit
of output (credit trading). Two types of market structure are considered: perfect competition and Cournot oligopoly. We find
that output, abatement costs and the number of firms are higher under credit trading. Allowing trade between permit-trading
and credit-trading sectors may increase welfare. With perfect competition, permit trading always leads to higher welfare than
credit trading. With imperfect competition, credit trading may outperform permit trading. Environmental policy can lead to
exit, but also to entry of firms. Entry and exit have a profound impact on the performance of the schemes, especially under
imperfect competition. We find that it may be impossible to implement certain levels of total industry emissions. Under credit
trading several levels of the relative standard can achieve the same total level of emissions. |
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