Alternative intertemporal permit trading regimes with stochastic abatement costs

Feng, Hongli; Zhao, Jinhua

doi:10.1016/j.reseneeco.2005.04.002

Cited by 34 publications

(40 citation statements)

References 16 publications

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“…Thus, the active management of the permit allocation together with the planner's policy to neutralize the effect of the bank result in differing cap levels under banking and no banking. This is in contrast to the optimal allocation rule presented by Feng and Zhao (2006) where the cap levels are equal under banking and no banking. This difference is due to the regulator's ability to actively adjust the cap level based on the observed market outcome.…”

Section: Definition 3 the No-banking Critical Level Of Discount Factcontrasting

confidence: 61%

“…Following the setup in Feng and Zhao (2006), the economy produces a consumption good, q t , that yields stochastically evolving net benefits (surpluses) given by a function B(q t , θ t ). 6 The marginal benefit is strictly decreasing, B qq (q, θ) < 0, and satisfies conditions B q (0, θ) > 0 and lim q→∞ B q (q, θ) < 0.…”

Section: The Economy and Permit Marketsmentioning

confidence: 99%

“…In this sense, the problem of the speculative agents is easier under this kind of policy than in the competitive storage setting by Deaton and Laroque (1992). However, the market agents have here less information than in a two-period models of emission permit policy by Yates and Cronshaw (2001) and Feng and Zhao (2006).…”

Section: Lemma 1 Given An Equilibriumf (Q T θ T ) the Correspondinmentioning

confidence: 99%

“…They also provide a preliminary discussion of a full-fledged dynamic setting in which the regulator can update the allocation policy. Our paper is most closely related to paper by Feng and Zhao (2006) which refines the analysis in Yates and Cronshaw (2001) by distinguishing between three separate effects of banking on welfare. Their focus is on comparing two different ITRs: unitary and monetary equivalent interest rate.…”

mentioning

confidence: 90%

“…We next characterize the optimal cap and trade policy in a second-best setting and compare it with the first-best and second-best tax policies. The policy is second-best, since the planner has to set the environmental policy prior to observing the current shock realization (Weitzman, 1974;Yates and Cronshaw, 2001;Feng and Zhao, 2006). 13 In contrast, the market agents decide their actions after the shock is realized.…”

mentioning

confidence: 99%

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Optimal Management of Markets for Bankable Emission Permits

Lintunen¹,

Kuuselaa²

2015

SSRN Journal

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We examine the optimal management of emission permit markets when banking but not borrowing of permits is allowed. The regulator maximizes expected social welfare through an optimal allocation rule in an infinite horizon setting. The policy is second-best as the emission cap is set before the uncertainty about the current state of the economy is resolved. In this setting, the role of banking is to decrease the regulator's risk as it generates an endogenous price floor in the permit markets. We show that the regulator's optimal policy adjusts the emissions cap irrespective of the existing number of permits in the bank, with the implication that the regulator neutralizes the effect of the existing bank on future permit prices. We derive the optimality conditions for the second-best emission cap with banking and solve the model analytically in the case of IID shocks. Our results show that the discount factor together with the slopes of the marginal damages and benefits determine the welfare gains from allowing banking of permits. Finally, to address the current state of the EU Emission Trading Scheme (EU ETS) and guide the design of future permit markets, we solve the model numerically with persistent shock process and show that the optimal emission cap is positively correlated with business cycles, meaning that during downturns the regulator should tighten the cap. The expected emissions and permit prices also correlate positively with economic activity.JEL classification: E32, Q54, Q58

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Section: Definition 3 the No-banking Critical Level Of Discount Factcontrasting

confidence: 61%

Section: The Economy and Permit Marketsmentioning

confidence: 99%