Emissions Trading with Offset Markets and Free Quota Allocations

This paper studies interactions between a "policy bloc's" emissions quota market and an offset market where emissions offsets can be purchased from a non-policy "fringe" of countries (such as for the Clean Development Mechanism under the Kyoto Protocol). Policy-bloc firms enjoy free quota allocations, updated according to either past emissions or past outputs. Both overall abatement and the allocation of given abatement between the policy bloc and the fringe are then inefficient. When the policy-bloc quota and offset markets are fully integrated, firms buying offsets from the fringe, and all quotas and offsets, must be traded at a single price; the policy bloc will either not constrain the offset market whatsoever, or ban offsets completely. These cases occur when free allocation of quotas is less (very) generous, and the offset market delivers large (small) quota amounts. Governments of policy countries would instead prefer to buy offsets directly from the fringe at a price below the policy-bloc quota price. The offset price is then below the marginal damage cost of emissions and the quota price in the policy bloc is above the marginal damage cost. This is also inefficient as the policy bloc, acting as a monopsonist, purchases too few offsets from the fringe.

Bibliographic Details

Main Authors:	Rosendahl, Knut Einar, Strand, Jon
Language:	en_US
Published:	World Bank, Washington, D.C. 2012-11
Subjects:	abatement, abatement costs, abatement options, allocation, allocation mechanism, amount of abatement, asymmetric information, auctions, cap level, carbon, carbon leakage, carbon markets, carbon tax, Carbon Taxes, Clean Development, Clean Development Mechanism, climate, Climate Economics, Climate Policies, climate policy, CO2, competitiveness, constant emissions, costs of abatement, costs of emissions, damages, discount factor, domestic abatement, domestic emissions, domestic emissions reductions, Ecological Economics, Economic Analysis, Emission, emission intensity, Emission quota, emission quotas, emission trading, emission trading system, Emissions, Emissions Allowances, emissions constraint, Emissions Effects, emissions intensities, emissions intensity, emissions leakage, emissions offsets, emissions quota, emissions quotas, emissions reductions, emissions rights, Energy Economics, energy input, Energy Policy, energy use, Environmental Economics, environmental protection, expenditure, expenditures, financial support, fossil, fossil energy, fossil fuel, fossil fuels, free allocation, Free Allowances, fuel extraction, fuel switching, GHGs, global carbon market, global emissions, global net emissions, greenhouse, greenhouse gases, hc, industrial activity, inflation, international markets, lower costs, marginal abatement, marginal abatement cost, marginal cost, market trading, offset price, power, Price Discrimination, price increases, price of offsets, Public Economics, purchases of offsets, purchasing, real emissions, Resource Economics, sales, substitute, supplier, total emissions, tradable emissions, transaction costs, use of offsets,
Online Access:	http://hdl.handle.net/10986/16344
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