Time Horizons and Emissions Trading

Abstract

I study cap and trade schemes where feedback mechanisms from the market for allowances determine, at least in part, the cap on emissions and where the scheme ends with a hard ban on emissions. The effect of bringing forward te ban depends on the supply mechanism in place: under a price mechanism (supply increasing in the allowance price) the reduction in equilibrium emissions from an earlier ban is positive and bounded from below, whereas it is bounded from above and possibly negative under a quantity mechanism (supply decreasing in the surplus of unused allowances). I characterize these bounds and provide conditions under which they coincide. I also identify sufficient conditions for which an earlier ban leads to strictly higher emissions under a quantity mechanism.

Date