Market Design in Cap and Trade Programs: Permit Validity and Compliance Timing

Stephen Holland and Michael R. Moore

No 18098, NBER Working Papers from National Bureau of Economic Research, Inc

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 compare and contrast 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 non-unique, "degenerate" prices not determined by marginal abatement costs. Degenerate prices are unlikely to be discovered by market forces. We then present two examples which are not invariant to compliance timing. If permit allocation is delayed or if a price cap is implemented with a reserve fund, abatement may depend on compliance timing. We demonstrate the model's broad applicability by illustrating different types of temporal and spatial permit validity.

JEL-codes: H4 Q4 Q5 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-agr, nep-ene and nep-env
Note: EEE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Holland, Stephen P. & Moore, Michael R., 2013. "Market design in cap and trade programs: Permit validity and compliance timing," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 671-687.

Downloads: (external link)
http://www.nber.org/papers/w18098.pdf (application/pdf)

Related works:
Journal Article: Market design in cap and trade programs: Permit validity and compliance timing (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:18098

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w18098

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().