Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading Under Perfect and Imperfect Competition

Boom, Jan-Tjeerd; Dijkstra, Bouwe R.

doi:10.1007/s10640-009-9266-8

Cited by 25 publications

(22 citation statements)

References 17 publications

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“…These results complement and extend the …nding by Helfand (1991), Fischer (2001) and Holland et al (2009) that intensity standards are generally ine¢ cient, and the more recent studies by Boom and Dijkstra (2009) and Holland (2012) showing that in the absence of market power intensity standards cannot attain the …rst-best outcome whereas an absolute emissions trading scheme can. 1 Boom and Dijkstra (2009) …nd that the welfare comparison between the two schemes under imperfect competition is ambiguous in both the short run and the long run.…”

Section: Introductionsupporting

confidence: 85%

“…Boom and Dijkstra (2009) and Holland (2012) show that cap-and-trade maximizes welfare under perfect competition (in the short run and the long run), and emission trading based on an intensity standard does not. Boom and Dijkstra (2009) …nd that the welfare comparison is ambiguous under imperfect competition. On the one hand, if competition is 'close to' perfect, one would expect the perfect-competition result of higher welfare under capand-trade.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

On Emissions Trading and Market Structure: Cap-and-Trade versus Intensity Standards

Vries

Dijkstra

McGinty

2013

Environ Resource Econ

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Section: Introductionsupporting

confidence: 85%

Section: Introductionmentioning

confidence: 99%

On Emissions Trading and Market Structure: Cap-and-Trade versus Intensity Standards

Vries

Dijkstra

McGinty

2013

Environ Resource Econ

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“…Sim and Lin [7] also incorporated Cournot competitive international output market under the setting of cross-border pollution. Similarly, the case of imperfect competition was analyzed in various papers including Boom and Dijkstra [23] and Fowlie [17]. The former compared the efficiency of cap-based and rate-based emissions trading and the latter studied the leakage issue in the electricity market under the Cournot model.)…”

Section: Firmsmentioning

confidence: 99%

Inelastic Supply of Fossil Energy and Competing Environmental Regulatory Policies

Hong

Sim

2018

Sustainability

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Abstract:The inelastic supply of fossil energy in the international input market precipitates failure of Pigouvian taxation consequent to competition among governments, as imposition of an environmental tax increases (decreases) the marginal cost of domestic (foreign) firms. This paper demonstrates that unless the supply of fossil energy is perfectly elastic, cap-and-trade outperforms Pigouvian taxation in terms of the domestic welfare of adopting countries, and global welfare is maximized when all countries implement the alternative scheme. We further demonstrate that the linkage of permit markets, when the energy supply is sufficiently inelastic, improves global welfare.

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“…However, it took another decade before economists started to apply a similar analysis to a scheme of emissions standards where emission reduction credits are traded between sources and compared the outcome with cap-and-trade (e. g. Fischer, 2001;Dewees, 2001;Gielen et al, 2002;Woerdman, 2002:chpt. 5;Boom and Nentjes, 2003;Boom and Dijkstra, 2009).…”

Section: Two Emissions Trading Conceptsmentioning

confidence: 99%

“…Consequently, a firm under CT only pays for abatement and not for mandated residual emissions. The component lacking in the marginal cost of output is calculated by multiplying the mandated emissions of the additional product with either the marginal cost of abating emissions or with the price of an emission reduction certificate (Boom and Dijkstra, 2009). The non-included abatement cost of marginal output under a performance standard has been interpreted as an implicit output subsidy (Helfand, 1991), which also holds for PSRT (e. g. Fischer, 2001;Dewees, 2001;Boom, 2006:chpt.…”

Section: Decisions At Firm Levelmentioning

confidence: 99%

Emissions Trading Hybrids: The Case of the EU ETS

Woerdman

Nentjes

2019

Review of Law &Amp; Economics

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We argue that the European Union Emissions Trading System (EU ETS) has evolved into a hybrid of two design variants, allowance trading (cap-andtrade) and credit trading (performance standard rate trading), with an added feature of industry support to minimize carbon leakage. In particular the current rules tying free allowances to production capacity expansion, plant closure and capacity use have transformed the efficient cap-and-trade program that stood at the origins of the EU ETS into a system that even surpasses credit trading in paying hidden product subsidies to firms. This combination of rules encourages an inefficiently high level of investment in production capacity and an inefficiently high output in industries exposed to international competition. The result is a sub-optimal EU Emissions Trading 'Hybrid' (which we therefore label as 'EU ETH').European Parliament and the Council of the European Union have since adopted an amending Emissions Trading Directive introducing some new rules to apply in the current and third period 2013-2020 (Directive 2009/29/EC). Early 2018 the European Council approved another reform of the EU Emissions Trading System (EU ETS) for the next and fourth period 2021-2030 (Directive (EU) 2018/410). In this paper we aim to examine which rules have changed between the first and the third period and how efficiently the reduction of CO 2 emissions is currently being achieved under the EU ETS. Our economic analysis thus focuses on legal amendments made to the EU ETS so far (2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015)(2016)(2017)(2018)(2019)(2020), leaving an analysis of the next period's rules (2021-2030) for future research.We start with a survey of the economic-analytical literature on emissions trading and use that knowledge to assess the efficiency of the original EU Emissions Trading Directive of 2003 and its deterioration due to the changes after 2013. We will explain why the additional rules applying to capacity expansion and plant closure lead to sub-optimal outcomes. A next set of new rules added an extra criterion for the allocation of free allowances by tying their number to the level of operations relative to capacity. Although this was possibly meant as a reparation, we will argue that this has in fact done further damage to the efficiency of the scheme. The various rather complex criteria for the allocation of free allowances did already receive attention by a number of scholars, such as Ahman and Holmgren (2006), Ellerman (2008), Christin et al. (2011), Meunier et al. (2014) and Branger et al. (2015. However, the niche of our paper is that we: (a) perform the analysis based on the conceptual distinction between allowance trading (cap-and-trade) and credit trading (performance standard rate trading); (b) use the current laws and regulations to model firm behaviour under the amended EU ETS; and (c) clarify -in two tables -how the successive revisions of rules in the past have affected corporate decisions and hence the efficiency of EU ETS.In Section...

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Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading Under Perfect and Imperfect Competition

Abstract: Emissions trading, Entry and exit, Permit allocation, Cap-and-trade, Rate-based emissions trading, H23, H3, Q48, Q52, Q58,

Cited by 25 publications

References 17 publications

On Emissions Trading and Market Structure: Cap-and-Trade versus Intensity Standards

On Emissions Trading and Market Structure: Cap-and-Trade versus Intensity Standards

Inelastic Supply of Fossil Energy and Competing Environmental Regulatory Policies

Emissions Trading Hybrids: The Case of the EU ETS

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