Modeling of emission trading: A literature review for dynamic partial equilibrium models with perfect competition

Abstract

This paper reviews the literature of emission trading models in case of partial equilibrium with perfect competition. First, we introduce the economics of pollution control and the origins of emission trading. Second, we review the static models of permit market, investigating a number of factors that can affect the effectiveness of emission trading. Next, we present dynamic models, analyzing questions such as banking/borrowing, relationship between spot and future markets, exogenous factors influencing the marginal abatement cost, etc. We end with recent studies that model the main features of the European Emission Trading Scheme in a dynamic framework with stochastic emissions.