Abstract:The European Union's Emissions Trading System used to be a cap-andtrade scheme with a fixed supply of permits. However, a recent reform of the system 'punctures the waterbed' by making the supply of permits endogenous. The current paper discusses how to handle permits in economic evaluations such as cost-benefit analysis. It derives general equilibrium rules for schemes with a fixed cap as well as schemes with an endogenous cap. The paper also derives a cost-benefit rule to use when an exogenous reduction in e… Show more
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