Emissions Trading Subject to Kantian Preferences

Magnus Hennlock, Åsa Löfgren (), Thomas Sterner and Peter Martinsson
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Magnus Hennlock: IVL Swedish Environmental Research Institute
Åsa Löfgren: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 GÖTEBORG, Sweden, http://www.economics.gu.se

No 718, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: We study a cap-and-trade market equilibrium where different regions belonging to an emissions trading regime have different ambitions about the stringency of the cap. Specifically, we introduce a segment of consumers with Kantian preferences and show that they would prefer a more stringent cap compared to other regions. When a region sets up a voluntary more stringent cap within a cap-and-trade market, dual carbon markets with dual prices on allowances can emerge with trade against both caps. We then show that labelling a subset of the allowances in a cap-and-trade market captures the higher willingness to pay driven by different ambition levels among agents within a trading scheme. We show under what circumstances a socially efficient outcome from carbon markets can be achieved by labelling allowances when there are heterogeneous preferences among regions about the ambition level in an emissions trading regime. Being voluntary, trade in labelled allowances is consistent with a bottom-up approach where efforts are built up gradually by actors, countries and regions that wants to take leadership in international climate policy.

Keywords: emissions trading; emissions allowances; carbon markets; public goods; ethics; Kant (search for similar items in EconPapers)
JEL-codes: D03 D62 D63 Q54 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2018-01
New Economics Papers: this item is included in nep-ene, nep-env and nep-res
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