Tradable Emissions Permits with Offsets

Nathan Braun, Timothy Fitzgerald and Jason Pearcy

in Emissions Trading as a Policy Instrument

Published by The MIT Press

Published in print August 2015 | ISBN: 9780262029285
Published online January 2016 | e-ISBN: 9780262330435 | DOI:
Tradable Emissions Permits with Offsets

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This chapter extends the existing theory of tradable emissions permit markets to allow for tradable permits and offsets. Offsets are currently incorporated into the EU ETS, and in the future similar assets will likely become a feature of many pollution control systems. A model is developed with multiple compliance assets, offset quotas, and different transaction costs across compliance assets. Either offset usage quotas or additional transaction costs associated with surrendering offsets can lead to an equilibrium price difference between permits and offsets, as experienced in the EU ETS. Another result of the chapter shows that offset usage quotas alone cannot explain observed offset behavior in the EU ETS, but combining offset usage quotas with firm-level heterogeneity in transaction costs can be consistent with observed EU ETS behavior. Annual compliance data from Phase I and II of the EU ETS are used to support the consistency of the theory.

Keywords: Pollution Control; Emission Permits; Emission Offsets; Cap and Trade

Chapter.  8642 words.  Illustrated.

Subjects: Economic Development and Growth

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