A General Equilibrium Approach to Carbon Permit Banking

Jean-Guillaume Sahuc, Loick Dubois and Gauthier Vermandel

No 2025-5, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: We study the general equilibrium effects of carbon permit banking during the transition to a climate-neutral economy by 2050. To this end, we develop an environmental dynamic stochastic general equilibrium model, in which the business sector is regulated by a generic emission trading system (ETS). Firms are authorized to transfer unused permits from one period to the next (banking), but the reverse direction (borrowing) is prohibited. Allowing for positive banking gives firms the opportunity to smooth their permit demand along the business cycle. Applications inspired by recent European Union-ETS regulations underscore the critical role of permit banking in shaping policy outcomes. For example, the 2023 cap reform would result in a more significant reduction in both permit banking and carbon emissions, as well as a 40% to 50% increase in the carbon price compared to pre-reform projections, without substantial additional GDP loss by 2060. Importantly, forgetting about permit banking when assessing cap policies would lead to both a significant underestimation of the total macroeconomic effects and an inaccurate representation of the carbon emission trajectory.

Keywords: Emission trading systems; cap policies; carbon permit banking; environmental real business cycle model; occasionally-binding constraints; nonlinear estimation (search for similar items in EconPapers)
JEL-codes: C32 E32 Q50 Q52 Q58 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2025
New Economics Papers: this item is included in nep-dge, nep-ene and nep-env
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https://economix.fr/pdf/dt/2025/WP_EcoX_2025-5.pdf (application/pdf)

Related works:
Journal Article: A general equilibrium approach to carbon permit banking (2025)
Working Paper: A General Equilibrium Approach to Carbon Permit Banking (2025)
Working Paper: A General Equilibrium Approach to Carbon Permit Banking (2024)
Working Paper: A General Equilibrium Approach to Carbon Permit Banking (2024)
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