Cap-and-Trade Programs under Delayed Compliance

Makoto Hasegawa and Stephen Salant

RFF Working Paper Series from Resources for the Future

Abstract: Virtually every analysis of cap-and-trade programs assumes that firms must surrender permits as they pollute. However, no program, existing or proposed, requires such continual compliance. Some (e.g. the Acid Rain Program limiting SO2 emissions) require compliance once a year; others (e.g. the Regional Greenhouse Gas Initiative limiting CO2 emissions) require compliance every three years. The paths of emissions and permit prices would be invariant to compliance timing (Holland-Moore, 2013) if the government never injected additional permits between successive compliance dates. However, virtually all emissions trading programs require such injections through either (1) interim permit auctions or (2) sales from "cost containment reserves" intended to cap permit prices. In such cases, analyses which abstract from delayed compliance may mislead policy makers. For example, a cost containment reserve judged sufficient to cap prices at a ceiling over a year may sell out in a single day.

Keywords: emissions trading; marketable permits; price collar; safety valve; price ceiling; price floor (search for similar items in EconPapers)
JEL-codes: Q54 Q58 (search for similar items in EconPapers)
Date: 2014-07-23
References: Add references at CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Cap-and-Trade Programs under Delayed Compliance (2012)
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