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Reduced Allowability and the Allocation of Emission Abatement

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Aresin,  Sabine
Public Economics, MPI for Tax Law and Public Finance, Max Planck Society;

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http://ssrn.com/abstract=2691957
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Citation

Aresin, S. (2015). Reduced Allowability and the Allocation of Emission Abatement. Working Paper of the Max Planck Institute for Tax Law and Public Finance, No. 2015-12.


Cite as: https://hdl.handle.net/11858/00-001M-0000-0029-7AEC-5
Abstract
Introducing discounts on Certified Emission Reductions from the Clean Development Mechanism is often treated as if it only imposed a substitution effect on a firm’s decision between domestic and abroad abatement. Applying a cost minimization approach with a representative firm, I can show that reduced allowability generates a quantity effect in addition to the substitution effect. This quantity effect counteracts the substitution effect for abroad abatement. It may even cause abroad abatement to increase as a result of reduced allowability for Certified Emission Reductions. The results are robust to introducing a secondary market for emission credits, given endogenous prices.