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 - Department of Economics; Centre for Economic Policy Research (CEPR); CMCC - Euro Mediterranean Centre for Climate Change (Climate Policy Division); IPCC Working Group III

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 )
Campo S. M. Formosa, Castello 5252
Venezia, 30122
Italy
+39 04 1271 1453 (Phone)
+39 04 1271 1461 (Fax)
Ca Foscari University of Venice - Department of Economics ( email )
Cannaregio 873
Venice, 30121
Italy
+39 04 1234 9166 (Phone)
+39 04 1234 9176 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
CMCC - Euro Mediterranean Centre for Climate Change (Climate Policy Division)
73100 Lecce
Italy
Intergovernmental Panel on Climate Change (IPCC)
A. van Leeuwenhoeklaan 9
P.O. Box 1
BA Bilthoven 3720
Netherlands
+31 30 274 4281 (Phone)
+31 30 274 4464 (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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