FSS-ECON Seminar: Cap and (Frictional) Trade vs. Carbon Tax
Speaker: Prof. Kuk Mo JUNG, Associate Professor, School of Economics, Sogang University
Date：21 August 2024 (Wed)
Time：14:00 – 15:15
Venue: E21B-G002
Language: English
Abstract: We develop an equilibrium model of an over-the-counter emissions trading scheme, characterized by intermediation, search and bargaining frictions, and firm-specific abatement cost shocks. The interdealer permit price, intermediation fees, bid-ask spreads, and the distribution of permit holdings are all endogenously determined in the model. We analyze how these equilibrium prices and quantities respond to changes in the microstructure of the emissions trading scheme, the distribution of firm-specific abatement cost shocks, and the elasticity of the damage function with respect to carbon stocks. Through this analysis, we also shed new light on the ongoing debate about the ranking of carbon tax versus cap-and-trade for climate policy. Unlike Weitzman (1974) in which carbon taxes dominate the cap-and-trade system in the case of stock pollutants, our model predicts that the opposite can be true because trading frictions in the cap-and-trade system can lessen the negative externalities caused by abatement cost uncertainty. Calibrating our model parameters to transaction data from the EU ETS, we find evidence supporting our prediction.
