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Market design in cap and trade programs: Permit validity and compliance timing

Stephen Holland () and Michael R. Moore

Journal of Environmental Economics and Management, 2013, vol. 66, issue 3, 671-687

Abstract: Cap and trade programs have considerable heterogeneity in permit validity and compliance timing. For example, permits have different validities across time (e.g., banking, borrowing, and seasons) and space (e.g., zonal restrictions), and compliance timing can be annual, in overlapping cycles, or in multi-year periods. We discuss nine prominent cap and trade programs along these dimensions and construct a general model of permit validity and compliance timing. We derive sufficient conditions under which abatement is invariant to compliance timing, i.e., compliance timing cannot smooth abatement cost shocks. Under these conditions, (i) expected compliance costs are invariant, (ii) the variance of compliance costs increases with the delayed compliance, (iii) equilibrium prices may not be unique, and (iv) the delayed compliance equilibrium may rely on “degenerate” prices not determined by marginal abatement costs. We demonstrate the model's broad applicability by illustrating different types of temporal permit validity.

Keywords: Emissions permits; Banking; Borrowing; Delayed compliance; Abatement cost shocks (search for similar items in EconPapers)
Date: 2013
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Working Paper: Market Design in Cap and Trade Programs: Permit Validity and Compliance Timing (2012) Downloads
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DOI: 10.1016/j.jeem.2013.05.004

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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

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