Emission trading in Europe with an exchange rate

Klaassen, G., Forsund, F.R., & Amann, M. ORCID: https://orcid.org/0000-0002-1963-0972 (1994). Emission trading in Europe with an exchange rate. Environmental and Resource Economics 4 (4) 305-330. 10.1007/BF00692228.

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Abstract

This paper explores the analytical and empirical properties of a new method for emission trading according to a fixed exchange rate. The exchange rate is based on the ratios of the marginal costs of abatement in the optimal solution in order to account for the impact of the location of emission sources on the deposition. It is shown that, generally, this system will not achieve the optimal solution and does not guarantee that environmental deposition constraints are not violated, although total abatement costs are always reduced. A routine was developed to mimic trading as a bilateral, sequential process, subject to an exchange rate. In the example used, results for SO2 emissions in Europe show that, starting from a uniform reduction, exchange-rate trading achieves higher cost savings than one-to-one trading, without achieving the cost minimum. Sulfur deposition targets are not violated since the initial emission allocation overfulfilled targets at many places. The results are sensitive to: pre-trade emission levels, the transaction costs, the availability of information on potential cost savings and assumptions made on the behavior of trading partners.

Item Type:	Article
Uncontrolled Keywords:	Emission trading, air pollution, economic instruments, costs, europe, sulfur
Research Programs:	Transboundary Air Pollution (TAP)
Bibliographic Reference:	Environmental and Resource Economics; 4:305-330 [1994]
Depositing User:	IIASA Import
Date Deposited:	15 Jan 2016 02:03
Last Modified:	27 Aug 2021 17:14
URI:	https://pure.iiasa.ac.at/3843

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