Emissions trading system and supporting policies under an emissions reduction framework

Abstract

Emission trading system plays an increasingly important vole in reducing the pollution for environment. Through mathematical models, an analysis is made on the emissions trading system under an emission reduction framework. Four conclusions are drawn: (1) The impact by environmental taxes on the existing firm’s choices of optimal discharging amounts is uncertain, the existing firm’s discharging amounts will decrease with the increased prices of emissions permits, and paid initial emissions allowances will reduce the existing firm’s profits; (2) Under an intertemporal trading system, the existing firm’s holding permits conforms to the principle of profit maximization; (3) Under the intertemporal trading system, the prices for emissions permits for the entrant firms are always on the rise and so are their access costs into the industries, thus frustrating local governments’ efforts in attracting investments; and (4) Emissions reduction policy is a good regulatory measure for promoting local economic welfare and realizing sustainable development. Some suggestions are also given for triggering and activating the emissions trading system and formulating supportive policies, such as local governments are obliged to set prices for initial emissions permits to dampen the purchasing impulse of the existing firm and to avoid a thin market of emissions permits.