Intertemporal Permit Trading for the Control of Greenhouse Gas Emissions

This paper integrates two themes in the intertemporal permitliterature through the construction of an intertemporal bankingsystem for a pollutant that creates both stock and flow damages. A permit banking system for the special case of a pollutant thatonly causes stock damages is also developed. This latter,simpler case corresponds roughly to the greenhouse gas emissionreduction regime proposed by the U.S. Department of State as ameans of fulfilling the U.S. commitment to the FrameworkConvention on Climate Change. This paper shows that environmentalregulators can achieve the socially optimal level of emissionsand output through time by setting the correct total sum ofallowable emissions, and specifying the correct intertemporaltrading ratio for banking and borrowing. For the case ofgreenhouse gases, we show that the optimal growth rate of permitprices, and therefore the optimal intertemporal trading rate, hasthe closed-form solution equal to the ratio of current marginalstock damages to the discounted future value of marginal stockdamages less the decay rate of emissions in the atmosphere. Given a non-optimal negotiated emission path we then derive apermit banking system that has the potential to lower net socialcosts by adjusting the intertemporal trading ratio taking intoaccount the behavior of private agents. We use a simplenumerical simulation model to illustrate the potential gains fromvarious possible banking systems.     

The intertemporal externality in the dynamic common property renewable resource problem

We develop a model in which agent i's ‘catch’ in time t affects his and all other agents' ‘catches’ in time t + 1. There is no static externality in this dynamic model of the common property, only an intertemporal externality. We demonstrate that common property regimes correspond to lower steady-state stocks and lower welfare as compared to the competitive solution with no externalities.     

Information asymmetry,cluster trading,and market efficiency: Evidence from the Chinese stock market

This study investigates the effect of asymmetry information and illiquidity related to cluster trading on information integration efficiency in the Chinese stock market. The results show that information asymmetry and illiquidity related to cluster trading both negatively affect market efficiency in the Chinese stock market. While the effect of information asymmetry on market efficiency dominates in the informational period, the effect of illiquidity related to cluster trading dominates in other periods, when trading is less concentrated. Noise trading has a positive effect on market efficiency by greatly reducing the illiquidity related to cluster trading; however, its effect on information asymmetry is not significant. Our results provide insight into investors’ trading strategies.     

Emission Permit Trading Between Imperfectly Competitive Product Markets

The present paper analyzes the efficiency of emission permit trading between two imperfectly competitive product markets. Even if firms are price takers in permit markets, the integration of permit markets can decrease welfare because of imperfect competition in product markets. If there is asymmetric information between the regulator and firms, the integration of the permit markets could have a positive effect related to the flexibility of an integrated market; this flexibility can justify integrating the permit markets.     

Intertemporal Emission Permits Trading Under Uncertainty and Irreversibility

This paper analyzes the effect of emission permit banking on clean technology investment and abatement under conditions where the stringency of the future cap is uncertain. We examine the problem of heterogeneous firms minimizing the cost of intertemporal emission control in the presence of stochastic future pollution standards and emission permits that are tradable across firms and through time. A firm can invest in clean capital (an improved pollution abatement technology) to reduce its abatement cost. We consider two possibilities: that investment is reversible or irreversible. Uncertainty is captured within a two period model: only the current period cap is known. We show that if banking is positive and marginal abatement costs are sufficiently convex, there will be more abatement and investment in clean technology under uncertainty than there would be under certainty and no banking. These results are at odds with the common belief that uncertainty on future environmental policy is a barrier to investment in clean capital. Moreover, under uncertainty and irreversibility, we find that there are cases where banking enables firms to invest more in clean capital.     

Prices or Quantities Can Dominate Banking and Borrowing*

The possibility of intertemporal banking and borrowing of tradable permits is often viewed as tilting the various policy debates about optimal pollution control instruments towards favoring such time-flexible quantities. This paper shows that this view can be misleading, at least for the simplest dynamic extension of the original “prices versus quantities” information structure. The model of this paper allows firms to know and act upon the realization of uncertain future costs two full periods ahead of the regulators. For any given circumstance, the paper shows that either a fixed price or a fixed quantity is superior in expected welfare to time-flexible banking and borrowing. Furthermore, the standard original formula for the comparative advantage of prices over quantities contains sufficient information to completely characterize the regulatory role of intertemporal banking and borrowing. The logic and implications of these results are analyzed and discussed.     

Prices versus quantities versus bankable quantities

Quantity-based regulation with banking allows regulated firms to shift obligations across time in response to periods of unexpectedly high or low marginal costs. Despite its wide prevalence in existing and proposed emission trading programs, banking has received limited attention in past welfare analyses of policy choice under uncertainty. We address this gap with a model of banking behavior that captures two key constraints: uncertainty about the future from the firm's perspective and a limit on negative bank values (e.g. borrowing). We show conditions where banking provisions reduce price volatility and lower expected costs compared to quantity policies without banking. For plausible parameter values related to U.S. climate change policy, we find that bankable quantities produce behavior quite similar to price policies for about two decades and, during this period, improve welfare by about a $1 billion per year over fixed quantities.     

Present bias and the inefficiency of the centralized economy: The role of the elasticity of intertemporal substitution

We analyze an endogenous growth model considering agents with an isoelastic utility. Preferences are characterized by a utility affected by a negative externality, and a level of impatience which decays with the time distance from the present. Agents who cannot commit the actions of their future selves, play a game against them. The stationary equilibrium of this game defines a balanced growth path with a slower growth when played by subsequent central planners than when played by decision makers in the market economy. First, we prove that the fast growing market economy implies higher welfare if the negative externality is small, while the centralized economy is welfare improving above a given threshold for the externality (obtained for a specific family of non-constant discount functions). Secondly, we observe that this threshold increases with the elasticity of intertemporal substitution in consumption. Therefore, the greater this elasticity the more likely it is that the externality lies below this threshold, where policy interventions would not be adequate. Finally, as one would expect, the range of values of the externality for which the market equilibrium provides higher welfare widens the more different from constant discounting time preferences are, due either to a wider range of variation for the instantaneous discount rates or because these decay more slowly.     

Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading Under Perfect and Imperfect Competition

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.     

Technology adoption decisions under a mixed regulatory system of tradable permits and air pollution fees for the control of Total Suspended Particulates in Taiwan

By using a newly proposed tradable permit system built under the current air pollution fee regulation for the control of Total Suspended Particulates in Taiwan as an example, a mixed-integer non-linear programming model that minimizes the total regulatory costs of firms is applied to investigate how different permit trading ratios and the design of banking might affect firms’ technology adoption decisions and permit trading behavior. By incorporating binary variables in the model to represent firms’ decisions as to whether or not to install new control equipment, the results show that when the unit air pollution fee rate is higher than the firms’ abatement costs, the design of banking causes many firms to install new control equipment that results in an over-reduction of emissions. If no air pollution fee is imposed, the trading ratio plays a more important role than the reservation rate for banking in determining the firms’ emission reduction strategies under a pure permit trading scheme. While the conclusion from this study that uses a non-uniformly mixed pollutant as an example may hold only when certain conditions are met, the framework can be applied to other uniformly mixed pollutants through parameter changes without any limitation. In addition, the modeling technique presented here offers policy-makers a very convenient approach to empirical analysis.      

Optimal Policy with Tradable and Bankable Pollution Permits: Taking the Market Microstructure into Account

This paper analyzes how the way emission permits are traded—their market microstructure—affects the optimal policy to be adopted by the environmental agency. The microstructure used is one of a quote driven market type, which characterizes many financial markets. Market makers act as intermediaries for trading the permits by setting an ask price and a bid price. The possibility of bank permits is also introduced in our dynamic two‐period model. We consider two models whether the market makers are perfectly informed about the technology of the producers or not. When the market makers have complete information, the equilibrium price of permits is the same as if the market is walrasian. When they are imperfectly informed, they may set a positive spread between bid and ask permit prices, which creates some inefficiency as the marginal abatement costs of polluters do not equalize. By allowing more flexibility in the use of the permits, banking may reduce the spread. Moreover, it may introduce price rigidities due to intertemporal arbitrage. In this framework, the circumstances under which banking should be allowed or not depend crucially on the evolution of the marginal willingness to pay for the environment.     

The impact of trading floor closure on market efficiency: evidence from the Toronto Stock Exchange

On 23 April 1997, the Toronto Stock Exchange closed its trading floor, making it at that time the second-largest stock exchange in North America to choose a purely electronic trading environment for its equities. Exploiting this natural experiment, we find that the move to electronic trading resulted in a higher cost of immediacy (bid–ask spreads), increased information asymmetry and an overall deterioration of short-horizon return predictability from past order flows, reducing the efficiency of price discovery. Our results suggest that the human element plays an important role in order execution and complements automated electronic trading by improving the efficiency of incorporating new information into prices.     

Intertemporal Emission Trading with a Dominant Agent: How does a Restriction on Borrowing Affect Efficiency?

In this paper we analyze how restricting intertemporal trading by prohibiting borrowing of emissions permits affects the ability of a dominant agent to exploit its market power. We show that the monopolist could take advantage of the constraint on borrowing by not distributing the sale of permits cost-effectively across periods. Furthermore, we show that a constant present-value price over time does not imply a cost- effective distribution of abatement (permit sales) across periods.     

Variety‐Controlling Public Policy Under Addiction and Saturation

This paper constructs a tractable general equilibrium model for investigating the dissimilar effects of addiction and saturation on consumption and public policy. By introducing an industry‐specific intertemporal consumption externality, we provide clear analytical results that a lump‐sum subsidy for firms can increase welfare in the presence of a negative externality (saturation). A tax can accomplish the same given a positive externality (addiction). Unlike existing studies of cultural goods, these results are not based on assumptions concerning exogenous different preferences across groups, but rather on conventional monopolistic competition and consumption habit formation models in macroeconomics.     

Does Distribution Matter? Efficiency, Equity and Flexibility in Greenhouse Gas Abatement

This paper analyses banking and borrowing ofcarbon emission rights within the framework ofa simple, integrated assessment model. Breaking the world economy in just two regionsit will be shown: (1) Increasing intertemporal flexibility in greenhouse gasabatement through banking and borrowing ofcarbon emission permits has a positive effecton welfare for regions with a poor endowment incarbon emission rights, but negatively affectsrich-endowed regions. (2) Intergenerationalfairness advocates intertemporal flexibility ingreenhouse gas abatement, irrespectively of theinitial allocation of carbon rights. (3)Optimal carbon accumulation is not independentof the initial allocation of carbon rights. Different initial sharing rules clearlyinfluence the development of atmospheric carbonconcentration.     

WELFARE ANALYSIS OF THE VEHICLE QUOTA SYSTEM IN CHINA

This article presents a welfare analysis of the vehicle quota system of Shanghai, China. The empirical findings suggest that the quota system leads to both welfare loss as a result of reduction in vehicle transactions and welfare gain because of less externality of auto consumption. The net effect depends on the shadow price of the marginal externality, the assumption of vehicle lifetime, and market conditions such as consumers' intrinsic preference for vehicles. Compared to a progressive tax system, the quota system is less effective in vehicle control but more efficient in improving social welfare.     

Carbon Trading with Imperfectly Observable Emissions

The Kyoto Protocol foresees emission trading but does not yet specify verification of (uncertain) emissions. This paper analyses a setting in which parties can meet their emission targets by reducing emissions, by investing in monitoring (reducing uncertainty of emissions) or by (bilaterally) trading permits. We derive the optimality conditions and carry out various numerical simulations. Our applications suggest that including uncertainty could increase compliance costs for the USA, Japan and the European Union. Central Europe and the Former Soviet Union might be able to gain from trading due to higher permit prices. Emissions trading could also lower aggregate uncertainty on emissions.     

Ex-post efficient permit markets: a detailed analysis

This paper provides a detailed analysis of ex-post efficient permit markets. After a short review of institutional designs that can achieve ex-post efficiency under uncertainty and asymmetric information, we analyze the effects of an ex-post efficient regulation on the expected costs of the regulated firms, on their investment behavior, and on the incentives for strategic behavior on imperfectly competitive permit markets. Also we inquire about the budget effects of the regulation. Our results show that ex-post efficient permit markets have considerable benefits beside the direct increase in expected social welfare.      

Futures Contracts in Water Leasing: An Experimental Analysis Using Basin Characteristics of the Rio Grande,NM

Providing for increased water demands during periods of persistent drought and climatic variability may require water managers, users and planners to think differently about how water resources are allocated. A water marketing institution that allows water rights holders to reallocate water on a temporary basis could overcome these challenges with minimal conflict. In this paper, a water marketing institution that allows for the temporary reallocation of water rights in a spot and futures market is investigated. The results provide insight into three key questions: (1) how does trading impact the physical system, (2) does the value of water differ by trading agents, (3) how is economic welfare redistributed as a result of trading? Results of experimental treatments display minor impacts to the physical system, that prices differ across the different type of trading agents and the addition of a futures market has the ability to decrease market prices while increasing economic welfare as a futures market allows users to hedge against future water uncertainty.     

农业面源污染控制的一体化环境经济政策体系研究

农业面源污染由于排放主体的分散性和隐蔽性、污染发生的随机性、污染负荷的时空差异性,使得农业面源污染具有很强的外部性、不确定性和非对称信息,这是农业面源污染控制的理论依据。文章在对农业面源污染控制面临的污染控制成本不确定性、污染者排污水平不确定性进行理论分析后,构建了农业面源污染控制的一体化环境经济政策体系,指出农业面源污染控制须针对各责任主体设计独特化、具体化、精确化、针对性的环境经济政策。