Rene Carmona
Emissions Market Models
The main goal of the talk is to introduce a new cap-and-trade
scheme design for the control and the reduction of atmospheric
pollution. The tools developed for the purpose of the study are
intended to help policy makers and regulators understand the pros and
cons of the emissions markets at a quantitative level. We propose a
model for an economy where risk neutral firms produce goods to satisfy
an inelastic demand and are endowed with permits by the regulator in
order to offset their pollution at compliance time and avoid having to
pay a penalty. Firms that can easily reduce emissions do so, while
those for which it is harder buy permits from those firms anticipating
that they will not need them, creating a financial market for pollution
credits. Our model captures most of the features of the European Union
Emissions Trading Scheme. We show existence of an equilibrium and
uniqueness of emissions credit prices. We also characterize the
equilibrium prices of goods and the optimal production and trading
strategies of the firms. We choose the electricity market in Texas to
illustrate numerically the qualitative properties observed during the
implementation of the first phase of the European Union cap-and-trade
CO2 emissions scheme, comparing the results of cap-and-trade schemes to
the Business As Usual benchmark. In particular, we confirm the presence
of windfall profits criticized by the opponents of these markets. We
also demonstrate the shortcomings of tax and subsidy alternatives.
Finally we introduce a relative allocation scheme which, despite its
ease of implementation, leads to smaller windfall profits than the
standard scheme.