Market Design in Cap and Trade Programs: Permit Validity and Compliance Timing. Holland, S. P. & Moore, M. R. Journal of Environmental Economics and Management.
Market Design in Cap and Trade Programs: Permit Validity and Compliance Timing [link]Paper  doi  abstract   bibtex   
Abstract Cap and trade programs have considerable heterogeneity in permit validity and compliance timing. For example, permits have different validity across time (e.g., banking, borrowing, and seasons) and space (e.g., zonal restrictions), and compliance timing can be annual, in overlapping cycles, or in multi-year periods. We discuss nine prominent cap and trade programs along these dimensions and construct a general model of permit validity and compliance timing. We derive sufficient conditions under which abatement is invariant to compliance timing, i.e., compliance timing cannot smooth abatement cost shocks. Under these conditions, i) expected compliance costs are invariant, ii) the variance of compliance costs increases with delayed compliance, iii) equilibrium prices may not be unique, and iv) the delayed compliance equilibrium may rely upon “degenerate” prices not determined by marginal abatement costs. We demonstrate the model's broad applicability by illustrating different types of temporal permit validity.
@article{holland_market_????,
	title = {Market {Design} in {Cap} and {Trade} {Programs}: {Permit} {Validity} and {Compliance} {Timing}},
	issn = {0095-0696},
	shorttitle = {Market {Design} in {Cap} and {Trade} {Programs}},
	url = {http://www.sciencedirect.com/science/article/pii/S0095069613000703},
	doi = {10.1016/j.jeem.2013.05.004},
	abstract = {Abstract
Cap and trade programs have considerable heterogeneity in permit validity and compliance timing. For example, permits have different validity across time (e.g., banking, borrowing, and seasons) and space (e.g., zonal restrictions), and compliance timing can be annual, in overlapping cycles, or in multi-year periods. We discuss nine prominent cap and trade programs along these dimensions and construct a general model of permit validity and compliance timing. We derive sufficient conditions under which abatement is invariant to compliance timing, i.e., compliance timing cannot smooth abatement cost shocks. Under these conditions, i) expected compliance costs are invariant, ii) the variance of compliance costs increases with delayed compliance, iii) equilibrium prices may not be unique, and iv) the delayed compliance equilibrium may rely upon “degenerate” prices not determined by marginal abatement costs. We demonstrate the model's broad applicability by illustrating different types of temporal permit validity.},
	urldate = {2013-09-29},
	journal = {Journal of Environmental Economics and Management},
	author = {Holland, Stephen P. and Moore, Michael R.},
	keywords = {Abatement cost shocks, Banking, Borrowing, Delayed compliance, Emissions permits},
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}
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