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

Yuta Toyama
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Yuta Toyama: School of Political Science and Economics, Waseda University, Tokyo, Japan and Research Institute for Environmental Economics and Management, Waseda University, Tokyo, Japan

RIEEM Discussion Paper Series from Research Institute for Environmental Economics and Management, Waseda University

Abstract: I evaluate the welfare consequences of cap-and-trade regulation by considering permit banking and estimating transaction costs in permit trading. I construct a dynamic equilibrium model of emissions abatement and permit trading with banking. Applying it to the US Acid Rain Program, I simulate the impacts of transaction costs and alternative regulatory design. Transaction costs affect both inter-temporal and cross-sectional distribution of emissions, leading to greater health and environmental damage. Permit banking mitigates the negative effect of transaction costs on abatement costs and shifts the timing of emissions. Emissions tax can achieve an outcome close to dynamic capand-trade without transaction costs.

Keywords: Cap-and-trade regulation; dynamic equilibrium model; gains from trade; permit banking; transaction costs; electricity industry; sulfur dioxide emissions; nonuniformly mixed pollutants (search for similar items in EconPapers)
JEL-codes: D22 L94 Q52 Q58 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2022-11
New Economics Papers: this item is included in nep-dge, nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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