Emissions Trading and Intersectoral Dynamics: Absolute versus Relative Design Schemes

Frans de Vries, Bouwe Dijkstra and Matthew McGinty

No 2011-15, Stirling Economics Discussion Papers from University of Stirling, Division of Economics

Abstract: This paper examines the interdependence between imperfect competition and emis- sions trading in a two-sector (clean and dirty) economy. We compare the welfare implica- tions of an absolute cap-and-trade scheme (permit trading) with a relative intensity-based scheme (credit trading). We nd unambiguously more clean rms in the long run under credit trading. However, neither emissions trading con guration creates the rst-best out- come: there are too few (many) clean rms under permit (credit) trading. Permit trading dominates credit trading in terms of overall welfare at the long run equilibrium, except when policy is relatively lenient. It is also demonstrated that stricter policy does not necessarily induce the clean sector to grow relative to the dirty sector and we determine under what conditions this holds.

Keywords: emissions trading; imperfect competition; industrial change; pollution control; sectoral dynamics (search for similar items in EconPapers)
Date: 2011-07
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:stl:stledp:2011-15

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