The Design of a Dynamic Tradeable Quota System under Market Imperfections

Market power within a dynamic system of tradeable quotas with banking and borrowing of quotas leads to a nonoptimal distribution of abatement across agents. In this paper we introduce a quota system that may reduce the efficiency loss from market power and thereby result in a distribution of abatementacross agentsthat is closer to a cost-effective outcome. However, this system will in general lead to a nonoptimal distribution of abatementacross periods. Hence, we may face a trade-off between a cost-effective distribution of abatement across periods and reduced adverse effects of market power.