2002 World Congress of Environmental and Resource Economists

Banking has been an important component of sulfur dioxide (SO2) emissions trading in the U.S. Acid Rain Program and it is commonly included as a desirable feature of cap-and-trade programs for limiting emissions. This paper evaluates the performance of this temporal dimension of SO2 allowance trading based on the five years in which the SO2 bank was built up and the first year of draw-down that can now be observed. The price and aggregate quantity data for abatement present a puzzle. Prices have risen at about 15% a year while quantities (i.e.,emission reductions) have increased at only 6% a year. If generally accepted assumptions about costs are accepted, a significant temporal inefficiency isindicated. The apparent inconsistency in the evolution of prices and quantities can be eliminated by assuming greater curvature, or a more inelastic marginal abatement cost curve, but this assumptions leads to cost predictions that now seem unlikely. We also develop a model of autarkic banking in which a sub-set of “unsophisticated” participants follow compliance paths seemingly detached frommarket conditions. Finally, we offer an estimate of the potential losses from the apparent temporal inefficiency and draw some concluding observations for whatis still very much a work in progress.



	Paper Title:	A Puzzle In SO2 Emissions Trading: Temporal Inefficiency Or Higher Prices?
	Presenting Author:	Juan Pablo Montero (MIT)
	Coauthor 1:	A Denny Ellerman
	Coauthor 2:
	Coauthor 3:
	Abstract:	Banking has been an important component of sulfur dioxide (SO2) emissions trading in the U.S. Acid Rain Program and it is commonly included as a desirable feature of cap-and-trade programs for limiting emissions. This paper evaluates the performance of this temporal dimension of SO2 allowance trading based on the five years in which the SO2 bank was built up and the first year of draw-down that can now be observed. The price and aggregate quantity data for abatement present a puzzle. Prices have risen at about 15% a year while quantities (i.e.,emission reductions) have increased at only 6% a year. If generally accepted assumptions about costs are accepted, a significant temporal inefficiency isindicated. The apparent inconsistency in the evolution of prices and quantities can be eliminated by assuming greater curvature, or a more inelastic marginal abatement cost curve, but this assumptions leads to cost predictions that now seem unlikely. We also develop a model of autarkic banking in which a sub-set of “unsophisticated” participants follow compliance paths seemingly detached frommarket conditions. Finally, we offer an estimate of the potential losses from the apparent temporal inefficiency and draw some concluding observations for whatis still very much a work in progress.
	Link to paper:	http://weber.ucsd.edu/~carsonvs/papers/75.pdf

	Session / Day / Time	9C / Wednesday / 8:00 - 10:00 am

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