| Designing a U.S. Market for CO2 (2009) | |||||||||||||
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| Abstract and PDF report are also available on the MIT Joint Program on the Science and Policy of Global Change website (http://globalchange.mit.edu/).. In this paper we focus on one component of the cap-and-trade system: the markets that arise for trading allowances after they have been allocated or auctioned. The efficient functioning of the market is key to the success of cap-and-trade as a system. We review the performance of the EU CO2 market and the U.S. SO2 market and examine how the flexibility afforded by banking and borrowing, and the limitations on banking and borrowing, have impacted the evolution of price in both markets. While both markets have generally functioned well, certain episodes illustrate the importance of designing the rules to encourage liquidity in the market.. The authors gratefully acknowledge the financial support for this work provided by the MIT Joint Program on the Science and Policy of Global Change through a consortium of industrial sponsors and Federal grants. This research was also supported by a grant from the Doris Duke Charitable Foundation. | |||||||||||||
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