Market Design for Emission Trading Schemes

Abstract. The main thrust of the paper is the design and the numerical analysis of new capand-trade schemes for the control and the reduction of atmospheric pollution. The tools developed are intended to help policy makers and regulators understand the pros and the cons of the emissions markets. We propose a model for an economy where risk neutral firms produce goods to satisfy an inelastic demand and are endowed with permits by the regulator in order to offset their pollution at compliance time and avoid having to pay a penalty. Firms that can easily reduce emissions do so, while those for which it is harder buy permits from those firms anticipating that they will not need them, creating a financial market for pollution credits. Our model captures most of the features of the European Union Emissions Trading Scheme. We show existence of an equilibrium and uniqueness of emissions credit prices. We also characterize the equilibrium prices of goods and the optimal production and trading s...

• Type: Journal
• Year: 2010
• Where: SIAMREV
• Authors: René Carmona, Max Fehr, Juri Hinz, Arnaud Porchet
• Keywords: Capand-trade Schemes, European Union Emissions Trading Scheme, SIAMREV 2010, Windfall Profits