Permit Trading and Credit Trading: A Comparison ofCap-Based and Rate-Based Emissions Trading underPerfect 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 structureare considered: perfect competition and Cournot oligopoly. The effect of combining the twoschemes is also discussed.We find that output and abatement costs are higher under credit trading. Combiningthe two schemes may give an increase in welfare. With perfect competition, permit tradingalways leads to higher welfare than credit trading. With imperfect competition, credit tradingmay outperform permit trading.Environmental policy can lead to both entry and exit of firms. Entry and exit have aprofound impact on the performance of the schemes, especially under imperfect competition...