When to Pollute, When to Abate? Intertemporal Permit Use in the Los Angeles Nox Market

51 Pages Posted: 27 Aug 2008 Last revised: 21 Feb 2014

See all articles by Stephen P. Holland

Stephen P. Holland

University of California, Berkeley - Energy Institute; University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics

Michael R. Moore

University of Michigan - School of Natural Resource

Date Written: August 2008

Abstract

Intertemporal tradability allows an emissions market to reduce abatement costs. We study intertemporal trading of nitrogen oxides permits in the RECLAIM program in Southern California. A theoretical model captures the program's key intertemporal features: two overlapping permit cycles, two compliance cycles for facilities, and tradable permits. We characterize the competitive equilibrium; show that it is cost effective; and demonstrate the firms' incentive to delay abatement, i.e., to trade intertemporally. Using model extensions to explore market design issues, an arbitrage condition implies that the equilibrium is invariant to overlapping compliance cycles, but depends crucially on overlapping permit cycles. We empirically investigate intertemporal trading of permits using panel data on RECLAIM facilities for 1994-2006. Facilities undertake trading by using a considerable proportion of permits of the opposite cycle. We econometrically test two theoretical propositions -- delayed abatement and trading across cycles -- with a difference-in-differences estimator. The results neither contradict nor provide conclusive support of the theory.

Suggested Citation

Holland, Stephen P. and Moore, Michael R., When to Pollute, When to Abate? Intertemporal Permit Use in the Los Angeles Nox Market (August 2008). NBER Working Paper No. w14254. Available at SSRN: https://ssrn.com/abstract=1248777

Stephen P. Holland (Contact Author)

University of California, Berkeley - Energy Institute ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics ( email )

401 Bryan Building
Greensboro, NC 27402-6179
United States

Michael R. Moore

University of Michigan - School of Natural Resource ( email )

Ann Arbor, MI 48106-1248
United States
313-647-4337 (Phone)
313-936-2195 (Fax)

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