EFFICIENCY LOSS AND TRADABLE PERMITS



Table 1: Results of the Social Planner’s Model in year 1

10% reduction

20% reduction

Estimated Emission Level (ton)

72,859.3

72,859.3

Required NOx reduction (ton)

7,285.9

14571.9

Total ERCs issued (ton)

65,573.4

58287.5

No. of ERCs traded (ton)

5,868.7

9274.9

No. of unused ERCs (ton)

498.1

43.2

No. of buyers in the market

42

40

No. of sellers in the market

2

4

No. of firms with technology adoption

2

4

Annual abatement cost (in million)

0.74

1.2

horizon, their behavior were the same through year-1 to year-5. Table 1 presents the
simulation result for the first trading season only.

When the required reduction rate is increased to 20%, the excess supply was
reduced to only 43.2 tons. Two more firms from petroleum refining industries adopt
new control equipments. The trading volume and total annual abatement cost were
increased by 58% and 62%. Thus, a more stringent regulation rule on emission would
dissipate the excess supply of ERCs.

Applying the 10 % reduction rule in the second scenario, where firms’ actual
emission levels were extrapolated based on their historical trends, the volume of
traded ERCs was estimated as 17,458 units in the first year, which corresponds to
roughly about 27 percent of the total ERCs issued (65,573.4 units). In the first trading
season, 20 firms would be permit buyers while the other 24 firms would be sellers in
the market. Among those 24 sellers, four firms adopted new technology. The firms



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