Business cycles and emission trading with banking

Lintunen, Jussi; Kuusela, Olli-Pekka

doi:10.1016/j.euroecorev.2017.10.015

Cited by 26 publications

(27 citation statements)

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“…With probability 1 − P C the price is equal to the non-binding price level C . This is the endogenous price floor created by the speculative banking demand (Lintunen and Kuusela 2018). We illustrate this feature in Sect.…”

Section: A Commitment Solutionmentioning

confidence: 96%

“…Using the price function in (8), we define an equilibrium price function p(Q t , t ) that is similar to Deaton and Laroque (1996) and Lintunen and Kuusela (2018), and that will depend on the allowance cap and on the shock realization:…”

Section: Allowance Market Responsementioning

confidence: 99%

“…Since the caps are set sequentially, it is possible that the regulator that sets Q t and announces Q t+1 at the end of period t − 1 has an incentive to choose different Q t+1 once the period t shock is observed. This raises a dynamic consistency problem (Kydland 1975;Groot et al 2003;Lintunen and Kuusela 2018).…”

Section: The Planning Problemmentioning

confidence: 99%

“…Banking of allowances complicates the regulation problem in two important ways in the infinite horizon prices versus quantities setup. First, it raises the question of time consistency of the policy plan, which stems from the information structure of the regulation game (Lintunen and Kuusela 2018). Namely, the decision to save allowances depends on the expectations of the allowance price in the next period; however, the next period's allowance price depends on the regulator's cap decision which is set after the banking decision has been made.…”

Section: Introductionmentioning

confidence: 99%

“…In studies of banking and borrowing, on the other hand, the regulator's commitment has been an explicit, but often overlooked, assumption (Yates and Cronshaw 2001;Newell et al 2005;Feng and Zhao 2006). Lintunen and Kuusela (2018) have recently characterized the consistent policy in a cap-and-trade system with banking that is subject to persistent business cycle shocks. 4 However, their results focus on the constant marginal damage case, where the Pigovian tax is always preferable to a quantity-based instrument, and they do not solve the model with commitment.…”

Section: Introductionmentioning

confidence: 99%

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A Cap-and-Trade Commitment Policy with Allowance Banking

Kuusela

Lintunen

2019

Environ Resource Econ

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We examine the planner's dynamic regulation problem in an emission trading system (ETS) with allowance banking. The planner sets the emissions cap for the next period after the current period allowance market has cleared, but before knowing the next period's abatement cost realization. This creates a time consistency problem when banking is possible. We examine two policies to overcome the consistency problem: a commitment solution and the Markov perfect solution. We show that the endogenous price floor generated by the banking demand becomes an integral feature of the two policies. Hence, they can be best described as hybrid policies that combine elements from emissions taxes and tradable allowances. This reveals new welfare implications that have an influence on instrument choice in the traditional prices versus quantities setup. We compare the expected welfare outcomes of four different policy instruments: the commitment policy, the Markov policy, a Pigouvian tax, and a no-banking ETS. We show that allowing banking can yield welfare gains compared to tax and quantity regulation, with or without commitment.

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Section: A Commitment Solutionmentioning

confidence: 96%

Section: Allowance Market Responsementioning

confidence: 99%

Section: The Planning Problemmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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A Cap-and-Trade Commitment Policy with Allowance Banking

Kuusela

Lintunen

2019

Environ Resource Econ

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Optimal Emission Prices Over the Business Cycles

Lintunen

Vilmi

2021

Environ Resource Econ

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We prove that under the most typical circumstances optimal emission prices are procyclical, i.e., prices should be lower during recessions. The procyclicality is more likely when emissions propagate very slowly into environmental damage. A prime example of such process is $$\hbox {CO}_2$$ CO 2 emissions. We show that carbon prices should be closely linked to the fluctuations of the marginal utility of consumption, which implies relatively modest magnitude of carbon price fluctuations. Our findings imply that climate policies should focus on setting the carbon price to the optimal growth path level and give carbon price fluctuations only a secondary role. Opposite to the carbon price, the cyclicality of optimal emissions depends on the production technology in the energy sector, and may become countercyclical in future if the technology mix becomes less fossil dependent.

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Coping with the liquidity crisis: a new dynamic quota readjustment scheme for carbon markets

Jiang

et al. 2022

Environ Geochem Health

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Business cycles and emission trading with banking

Cited by 26 publications

References 50 publications

A Cap-and-Trade Commitment Policy with Allowance Banking

A Cap-and-Trade Commitment Policy with Allowance Banking

Optimal Emission Prices Over the Business Cycles

Coping with the liquidity crisis: a new dynamic quota readjustment scheme for carbon markets

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