Abstract

http://ssrn.com/abstract=1140581
 
 

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Banking Permits: Economic Efficiency and Distributional Effects


Valentina Bosetti


Fondazione Eni Enrico Mattei (FEEM); Bocconi University; CMCC - Euro Mediterranean Centre for Climate Change

Carlo Carraro


Fondazione Eni Enrico Mattei (FEEM); Ca' Foscari University of Venice; CMCC - Euro Mediterranean Centre for Climate Change (Climate Policy Division); IPCC; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Centre for European Policy Studies, Brussels

Emanuele Massetti


Fondazione Eni Enrico Mattei (FEEM) & Euro-Mediterranean Center for Climate Change; CMCC - Euro Mediterranean Centre for Climate Change

January 2008

CEPR Discussion Paper No. 6652

Abstract:     
Most analyses of the Kyoto flexibility mechanisms focus on the cost effectiveness of where flexibility (e.g. by showing that mitigation costs are lower in a global permit market than in regional markets or in permit markets confined to Annex 1 countries). Less attention has been devoted to when flexibility, i.e. to the benefits of allowing emission permit traders to bank their permits for future use. In the model presented in this paper, banking of carbon allowances in a global permit market is fully endogenised, i.e. agents may decide to bank permits by taking into account their present and future needs and the present and future decisions of all the other agents. It is therefore possible to identify under what conditions traders find it optimal to bank permits, when banking is socially optimal, and what are the implications for present and future permit prices. We can also explain why the equilibrium rate of growth of permit prices is likely to be larger than the equilibrium interest rate. Most importantly, this paper analyses the efficiency and distributional consequences of allowing markets to optimally allocate emission permits across regions and over time. The welfare and distributional effects of an optimal intertemporal emission trading scheme are assessed for different initial allocation rules. Finally, the impact of banking on carbon emissions, technological progress, and optimal investment decisions is quantified and the incentives that banking provides to accelerate technological innovation and diffusion are also discussed. Among the many results, we show that not only does banking reduce abatement costs, but it also increases the amount of GHG emissions abated in the short-term. It should therefore belong to all emission trading schemes under construction.

Number of Pages in PDF File: 32

Keywords: Banking, Climate Policy, Emission Trading, Flexibility

JEL Classification: C72, H23, Q25, Q28

working papers series





Date posted: June 5, 2008  

Suggested Citation

Bosetti, Valentina and Carraro, Carlo and Massetti, Emanuele, Banking Permits: Economic Efficiency and Distributional Effects (January 2008). CEPR Discussion Paper No. 6652. Available at SSRN: http://ssrn.com/abstract=1140581

Contact Information

Valentina Bosetti (Contact Author)
Fondazione Eni Enrico Mattei (FEEM) ( email )
C.so Magenta 63
Milano, 20123
Italy
Bocconi University ( email )
Via Gobbi 5
Milan, 20136
Italy
CMCC - Euro Mediterranean Centre for Climate Change
Viale Gallipoli, 49
Lecce, 73100
Italy
Carlo Carraro
Fondazione Eni Enrico Mattei (FEEM) ( email )
Isola di San Giorgio Maggiore 8
Venezia, 30124
Italy
+39 04 12700460 (Phone)
+39 04 12700412 (Fax)
Ca' Foscari University of Venice ( email )
Cannaregio 873
Venice, 30121
Italy
+39 04 1234 9166 (Phone)
+39 04 1234 9176 (Fax)
CMCC - Euro Mediterranean Centre for Climate Change (Climate Policy Division) ( email )
Via Augusto Imperatore 16
Lecce, 73100
Italy
+39 0832 288650 (Phone)
+39 0832 277603 (Fax)
IPCC ( email )
C/O World Meteorological Organization
7bis Avenue de la Paix
Geneva, CH-1211
Switzerland
+41-22-730-8208/54/84 (Phone)
+41-22-730-8025/13 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Centre for European Policy Studies, Brussels
1 Place du Congres
B-1000 Brussels, 1000
Belgium
+32 2 229 3911 (Phone)
+32 2 219 4151 (Fax)
Emanuele Massetti
Fondazione Eni Enrico Mattei (FEEM) & Euro-Mediterranean Center for Climate Change ( email )
Corso Magenta 63
20123 Milan
Italy
CMCC - Euro Mediterranean Centre for Climate Change
Viale Gallipoli, 49
Lecce, 73100
Italy
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References:  17
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