Question
Suppose two firms, A and B, are regulated by an emissions trading program (cap-and-trade). Each firm has been allocated permits to emit 100 tons of
Suppose two firms, A and B, are regulated by an emissions trading program ("cap-and-trade"). Each firm has been allocated permits to emit 100 tons of carbon, and the permits are transferrable. Suppose each firm's marginal abatement cost (i.e. its marginal cost of reducing emissions) is an increasing function of its own reduction. At the current allocation, Firm A's MAC = $90, and Firm B's MAC = $20.
Which of the following are true?
a) There is an incentive for firms A & B to buy or sell emissions permits.
b) The emissions permit market is in equilibrium at the current allocation.
c) The equilibrium outcome for the permit market would have Firm A reducing MORE than at the current allocation.
d) The equilibrium outcome for the permit market would have Firm B reducing MORE than at the current allocation.
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