Dynamics of optimal carbon prices with inter-temporal regulation
International Journal of Climate Change Strategies and Management
ISSN: 1756-8692
Article publication date: 11 January 2016
Abstract
Purpose
This paper aims to calibrate carbon price trajectories that maximize social welfare where banking and borrowing rules are applied.
Design/methodology/approach
Typically, there has been a consensus that banking and borrowing rules within the cap-and-trade system improve social welfare. This additional flexibility can achieve compliance cost smoothing by transferring carbon permits inter-temporally; however, there is also a side effect. Regulated agents have the freedom to escape from the given emissions limit by reallocating previously granted permits.
Findings
The market system’s flexibility can cause environmental damage by deviating annual or periodic emission limits, which can invalidate the original purpose of cap-and-trade. This paper demonstrates how the socially desirable price trajectory differs from the one that favors the private sector.
Originality/value
Few studies have focused on the negative effects of combining the cap-and-trade with the inter-temporal regulation (banking and borrowing), which most policymakers and regulated firms can easily miss.
Keywords
Citation
Yu, J. (2016), "Dynamics of optimal carbon prices with inter-temporal regulation", International Journal of Climate Change Strategies and Management, Vol. 8 No. 1, pp. 2-18. https://doi.org/10.1108/IJCCSM-03-2014-0040
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited