Testing the Efficiency of a Tradeable Permits Market
Massachusetts Institute of Technology (MIT) - Center for Energy and Environmental Policy Research (CEEPR); Pontifical Catholic University of Chile - Institute of Economics
September 6, 2002
A tradeable permits market is said to be efficient when all affected firms trade permits until their marginal costs equal the market price. Detailed firm-level data are generally required to perform such an efficiency test, yet such information is rarely available. If firms face a declining target, however, and are allowed to bank permits, as has occurred recently, aggregated data such as the evolution of the permits bank is sufficient to test for either less than optimal market participation or the exercise of market power. An application to the U.S. sulfur dioxide emission permits market is provided.
Number of Pages in PDF File: 33working papers series
Date posted: February 4, 2003
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