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Information Aggregation in Emissions Markets with Abatement

Estelle Cantillon and Aurelie Cecile Dominique Slechten

No 251505309, Working Papers from Lancaster University Management School, Economics Department

Abstract: A key policy argument in favor of emissions markets (relative to command-and-control types of regulation) is their ability to aggregate dispersed information and generate price signals to guide firms' trading and abatement decisions. We investigate this argument in a multi-period model where firms receive noisy private signals about their current period emissions and privately observe their previous period emissions before this information is made public to the rest of the market. Firms respond to information by trading and abating emissions. We show that there exists a rational expectations equilibrium that fully aggregates firms' private information, justifying the policy argument in favor of emissions markets, in the absence of other frictions. We also derive predictions about how prices should be reacting to new private or public information and show that the possibility of abatement dampens the impact of shocks on prices. Finally, we show that the information aggregation result breaks down if firms' abatement costs are also private information.

Keywords: emissions trading; Information aggregation; efficient market hypothesis; price formation (search for similar items in EconPapers)
JEL-codes: G14 D83 D84 D85 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
Date: 2018
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http://www.lancaster.ac.uk/media/lancaster-univers ... casterWP2018_023.pdf (application/pdf)

Related works:
Journal Article: Information Aggregation in Emissions Markets with Abatement (2018) Downloads
Working Paper: Information Aggregation in Emissions Markets with Abatement (2018) Downloads
Working Paper: Information Aggregation in Emissions Markets with Abatement (2018) Downloads
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