Market Design for Emission Trading Schemes
Carmona, René; Fehr, Max; Hinz, Juri; Porchet, Arnaud (2010), Market Design for Emission Trading Schemes, SIAM Review, 52, 3, p. 403-452. http://dx.doi.org/10.1137/080722813
TypeArticle accepté pour publication ou publié
Journal nameSIAM Review
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Abstract (EN)The main thrust of the paper is the design and the numerical analysis of new cap- and-trade schemes for the control and the reduction of atmospheric pollution. The tools developed are intended to help policy makers and regulators understand the pros and the cons of the emissions markets. We propose a model for an economy where risk neutral ﬁrms produce goods to satisfy an inelastic demand and are endowed with permits by the regulator in order to oﬀset their pollution at compliance time and avoid having to pay a penalty. Firms that can easily reduce emissions do so, while those for which it is harder buy permits from those ﬁrms anticipating that they will not need them, creating a ﬁnancial market for pollution credits. Our model captures most of the features of the European Union Emissions Trading Scheme. We show existence of an equilibrium and uniqueness of emissions credit prices. We also characterize the equilibrium prices of goods and the optimal production and trading strategies of the ﬁrms. We choose the electricity market in Texas to illustrate numerically the qualitative properties observed during the implementation of the ﬁrst phase of the European Union cap-and-trade CO2 emissions scheme, comparing the results of cap- and-trade schemes to the Business As Usual benchmark. In particular, we conﬁrm the presence of windfall proﬁts criticized by the opponents of these markets. We also demonstrate the shortcomings of tax and subsidy alternatives. Finally we introduce a relative allocation scheme which despite of its ease of implementation, leads to smaller windfall proﬁts than the standard scheme.
Subjects / KeywordsEmissions Markets; Environmental Finance; Equilibrium models; Cap-and-trade Schemes
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