Abstract
A price on emissions can be achieved through an emission tax or permit trading. The advantages and drawbacks of either instrument are debated. We present an agent-based model to compare their performance under bounded rationality and dynamic markets. It describes firms that face uncertainty about future demand and prices; use heuristic rules to decide production levels, trading prices, and technology adoption; and are heterogeneous in terms of production factors, abatement costs, and trading behavior. Using multiple evaluation criteria and a wide range of parameter values, we find that the main difference between the two policies lies in the fact that permit prices fall after successful abatement. This can lead to higher production levels under permit trading, but can also drive emission-efficient firms out of the market. Scarcity rents under permit trading can further create higher profit rates for firms, the extent of which is shown to depend on the mechanisms for market-clearing and initial allocation.
Original language | English |
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Article number | 112009 |
Pages (from-to) | 1-14 |
Number of pages | 14 |
Journal | Energy Policy |
Volume | 148 |
Issue number | Part B |
Early online date | 12 Nov 2020 |
DOIs | |
Publication status | Published - Jan 2021 |
Funding
This study has received funding through an ERC Advanced Grant from the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation programme (grant agreement n°741087 ). I.S. acknowledges financial support from the Russian Science Foundation [RSF grant number 19-18-00262 ].
Funders | Funder number |
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Horizon 2020 Framework Programme | |
European Research Council | |
Russian Science Foundation | 19-18-00262 |
Horizon 2020 | 741087 |
Keywords
- Abatement
- Agent-based Modeling
- Carbon Tax
- Climate Policy
- Emission trading