Res econ 262- 4/25/17
Price volatility in emissions markets-
Lower than expected permit prices imply low incentives to reduce emissions. It makes it easier
for firms to just buy more permits if they are cheap and they end up decreasing abatement.
Sulfur dioxide trading market- there might have been too many permits with demand low and
The key to a TDP policy is that sources of emissions are able to trade permits (i.e., the rights to
Under reasonable conditions trade among the sources will establish a competitive permit price.
Each source treats the going permit price as constant when it makes its choice of how much to
emit and how many permits to hold.
The decision rule for the firm is to choose permits and emissions so that the going permit price is
equal to its marginal abatement costs
It is important to realize that the firm’s additional emissions e*- e are offset by other firms it
purchases permits from. Thus, aggregate emissions do not change as firms buy and sell permits.
In all cases the decision rule for the firm is to choose permits and emissions so that the going
permit price is equal to its marginal abatement costs. Therefore the initial distribution of permits
does not affect the final distribution of emissions.
Note that the permit price acts just like an emissions tax. For emissions above e*, it is cheaper
for the firm to reduce its emissions than to purchase the right to pollute. Below e* it