Dynamic Incentives and Permit Market Equilibrium in Cap-and-Trade Regulation

Yuta Toyama

American Economic Journal: Microeconomics, 2024, vol. 16, issue 3, 374-423

Abstract: This paper develops and estimates a dynamic structural model of emissions abatement, investment, and permit trading with banking under cap-and-trade regulation. The model accounts for forward-looking behavior and transaction costs in the permit market, which determine the temporal and geographical distribution of emissions in equilibrium and, thus, the welfare implications of the regulation. The model is applied to the US Acid Rain Program to evaluate the role of regulatory designs. Permit banking mitigates inefficiencies arising from transaction costs and modifies the timing of emissions. An emissions tax policy could achieve an outcome close to dynamic cap and trade without transaction costs.

JEL-codes: D23 H23 L94 L98 Q52 Q53 Q58 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Dynamic Incentives and Permit Market Equilibrium in Cap-and-Trade Regulation (2022)
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DOI: 10.1257/mic.20190377

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