Industry-Level Emission Trading in the EU
32
Lump sum transfers of the representative agent finance the exogenous government
demands in each region and the government transfers all revenues from carbon taxes or
auctioned carbon permits to the representative agent.
Two classes of conditions characterize the competitive equilibrium for our model: zero
profit conditions and market clearance conditions. The former class determines activity
levels and the latter determines price levels. In our algebraic exposition, the notation ∏↑r is
used to denote the profit function of sector j in region r where z is the name assigned to the
associated production activity. Differentiating the profit function with respect to input and
output prices provides compensated demand and supply coefficients (Shepard’s lemma),
which subsequently appear in the market clearance conditions. We use i (aliased with j) as
index for commodities (sectors), r (aliased with s) as index for regions and d as index for
the demand category (d=Y: intermediate demand, d=C: private household demand, d=G:
investment demand, d=I: investment demand). The label EG represents the set of energy
goods and the label FF denotes the subset of fossil fuels. Tables A.1 - A.6 explain the
notations for variables and parameters employed within our algebraic exposition.
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