Conference Agenda

Markets are an increasingly popular regulatory choice to cost effectively control negative externalities. Traditionally, market designs have employed a cap-and-trade format that places an absolute limit on the quantity of emissions. In contrast, many new schemes---including the world's largest in China---limit the aggregate emissions intensity of production. This article theoretically and experimentally compares intensity- and cap-based markets. We design a novel laboratory experiment, where firms choose both output and allowance exchange. Consistent with our theoretical predictions, we find that employing an intensity-based market rather than an equivalent cap-and-trade scheme significantly increases aggregate output, average allowance prices, aggregate abatement, and decreases industry profits. Overall, both markets perform as expected and close to the cost effective allocation of pollution abatement but with lower levels of aggregate profit as high production costs types produce significantly more output than predicted.

This article investigates the impact of market intermediaries in credit-based environmental markets, such as carbon or biodiversity credit markets. We develop a model in which firms can participate in the market either directly or via an intermediary. We focus on a market with demand uncertainty and evaluate two common forms of contracts between firms and the intermediary: a fixed-price contract and a share-price contract. Our theory predicts that introducing a dominant intermediary, under either contract type, increases the overall supply of credits but has an ambiguous impact on industry profits. A trade-off exists, where the intermediary enables firms with high entry costs (but low marginal costs) to enter the market but this is at the expense of incumbent firms, who reduce their supply and profits. We design a laboratory experiment to test our theoretical predictions for the case of positive intermediary effects. The results are largely consistent with theory and confirm the benefits of intermediaries over a range of parameter values that reflect varying demand and supply conditions. We additionally find a fixed-price contract is more effective at increasing supply than a share-price contract.

The simultaneous exposure to multiple air pollutants has become an increasingly pressing concern for policymakers seeking integrated market-based instruments to address this challenge effectively. This paper develops and analyzes a multipollutant cap-and-trade system encompassing a heterogeneous population of polluting firms and an independent pollution control authority responsible for issuing multipollutant permits. Each permit bundles rights to emit multiple pollutants, differing in both type and quantity across permits. The regulatory authority is assumed to observe the aggregate distribution of firm heterogeneity, allowing for settings in which detailed information on individual firms' pollution profiles remains private. The central challenge lies in the efficient allocation of a diverse set of permits across heterogeneous firms. To address this problem, the paper employs optimal mass transportation techniques to establish the existence of an optimal allocation of permits. The resulting allocation is decentralized: equilibrium permit prices induce firms to self-select into permits, yielding a geometric characterization of firm types based on their permit choices. The interaction between the distribution of firms, the spectrum of available permits, and heterogeneity in firms' payoffs generates strategic behavior in permit selection and leads to endogenous market segmentation within the cap-and-trade framework. The analysis further examines whether separate markets for individual pollutants can replicate the outcomes achieved under a multipollutant cap-and-trade system. Finally, numerical simulations based on computational geometry and optimal transport methods illustrate the determination of equilibrium permit prices and the resulting optimal partition of demand in a multipollutant permit market.

Carbon emissions caused by industrial production are among the most important drivers of climate change. This paper analyzes how multi-product firms adjust to the introduction of emissions pricing in terms of their output, product mix, and technology, and how their emissions change in response, depending on firm-specific production patterns and cost structures. My model delivers a qualitative and quantitative assessment of changes in aggregate emissions via conventional margins of firm adjustment that have not been sufficiently studied in the literature so far. In numerical simulations, I find that emissions pricing can significantly decrease emissions of multi-product firms.