Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297137 
Year of Publication: 
2023
Series/Report no.: 
LEM Working Paper Series No. 2023/29
Publisher: 
Scuola Superiore Sant'Anna, Laboratory of Economics and Management (LEM), Pisa
Abstract: 
In this work, we ask whether tradable emissions permits, based on the cap-and-trade principle, provide better climate change and economic projections than alternative regulations for GHG emissions, such as operational permits which are commonly used to mitigate non-GHG emissions (prevention first principle). Towards this goal, we simulate climate and the economy through a new version of the Dystopian Schumpeter meeting Keynes (DSK) model, extended to include an emission trading system (ETS) and operational permit systems. We show that climatic and economic projections in an ETS scenario need not be superior to those in an operational permit scenario. Which system delivers more encouraging projections on temperature anomalies, the green transition, and economic dynamics depends on institutional details, such as the set of firms for which permits are mandatory; the regulatory requirement of corrective measures; the magnitude of penalties; the stringency of the ETS. An ETS with a declining number of permits emerges as the best-performing system in terms of macroeconomic, microeconomic, and climate outcomes. A system of operational permits mandatory only for large firms (centralised permits) ranks as the second-best system, provided that the regulator imposes corrective measures regarding R&D expenses and machinery replacement.
Subjects: 
Climate change
Environmental permits
Emissions trading system
Polluter pays principle
Agent-based models
Macro-economic dynamics
JEL: 
C63
Q40
Q50
Q54
Document Type: 
Working Paper

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