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Aggregate impacts of cap-and-trade programs with heterogeneous firms

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  • Dardati, Evangelina
  • Saygili, Meryem

Abstract

We study the long-run effects on output, aggregate TFP, and welfare of alternative permit allocation schemes in a cap-and-trade program. We use a firm dynamics model with heterogeneous firms and add an emission market with a cap-and-trade regulation. We calibrate the model with establishment and emission data in the US and study three permit allocation methods: auctions, output-based-allocation, and grandfathering. A 40% reduction in emissions is associated with a welfare cost that is highest for auctioning (1.20%), followed by grandfathering (0.78%) and, finally, output-based allocation (0.70%). We also consider an endogenous abatement technology, which implies smaller but still significant welfare costs.

Suggested Citation

  • Dardati, Evangelina & Saygili, Meryem, 2020. "Aggregate impacts of cap-and-trade programs with heterogeneous firms," Energy Economics, Elsevier, vol. 92(C).
  • Handle: RePEc:eee:eneeco:v:92:y:2020:i:c:s0140988320302644
    DOI: 10.1016/j.eneco.2020.104924
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    3. Li, Xuelian & Zhou, Wei & Lin, Jyh-Jiuan & Chang, Ching-Hui, 2023. "Insurer financing for borrowing producers in a supply chain under alternative carbon allowance trades," Energy Economics, Elsevier, vol. 121(C).

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    More about this item

    Keywords

    Cap-and-trade programs; Permit allocation; Firm heterogeneity; Welfare; Aggregate productivity;
    All these keywords.

    JEL classification:

    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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