Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading under Perfect and Imperfect Competition

This paper compares emissions trading based on a cap on total emissions (permit trading) and on relative standards per unit of output (credit trading). Two types of market structure are considered: perfect competition and Cournot oligopoly. The e?ect of combining the two schemes is also discussed. We ?nd that output and abatement costs are higher under credit trading. Combining the two schemes may give an increase in welfare. With perfect competition, permit trading always leads to higher welfare than credit trading. With imperfect competition, credit trading may out perform permit trading. Environmental policy can lead to both entry and exit of ?rms. Entry and exit have a profound impact on the performance of the schemes, especially under imperfect competition. We ?nd that it may be impossible to implement certain levels of total industry emissions. Under credit trading several levels of the relative standard can achieve the same total level of emissions.