Dynamic Incentives and Permit Market Equilibrium in Cap-and-Trade Regulation

Toyama, Yuta

doi:10.1257/mic.20190377

Abstract

This paper develops and estimates a dynamic structural model of emissions abatement, investment, and permit trading with banking under cap-and-trade regulation. The model accounts for forward-looking behavior and transaction costs in the permit market, which determine the temporal and geographical distribution of emissions in equilibrium, and, thus, the welfare implications of the regulation. The model is applied to the U.S. Acid Rain Program to evaluate the role of regulatory designs. Permit banking mitigates inefficiencies arising from transaction costs and modifies the timing of emissions. An emissions tax policy could achieve an outcome close to dynamic cap-and-trade without transaction costs.

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Dynamic Incentives and Permit Market Equilibrium in Cap-and-Trade Regulation

Abstract

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