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Research output: Working paper
Research output: Working paper
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TY - UNPB
T1 - Information Aggregation in Emissions Markets with Abatement
AU - Cantillon, Estelle
AU - Slechten, Aurelie Cecile Dominique
PY - 2018/11
Y1 - 2018/11
N2 - A key policy argument in favor of emissions markets (relative to command-and-control types of regulation) is their ability to aggregate dispersed information and generate price signals to guide firms' trading and abatement decisions. We investigate this argument in a multi-period model where firms receive noisy private signals about their current period emissions and privately observe their previous period emissions before this information is made public to the rest ofthe market. Firms respond to information by trading and abating emissions. We show that there exists a rational expectations equilibrium that fully aggregates firms' private information, justifying the policy argument in favor of emissions markets, in the absence of other frictions. We also derive predictions about how prices should be reacting to new private or public information and show that the possibility of abatement dampens the impact of shocks on prices. Finally, we show that the information aggregation result breaks down if firms' abatement costs are also private information.
AB - A key policy argument in favor of emissions markets (relative to command-and-control types of regulation) is their ability to aggregate dispersed information and generate price signals to guide firms' trading and abatement decisions. We investigate this argument in a multi-period model where firms receive noisy private signals about their current period emissions and privately observe their previous period emissions before this information is made public to the rest ofthe market. Firms respond to information by trading and abating emissions. We show that there exists a rational expectations equilibrium that fully aggregates firms' private information, justifying the policy argument in favor of emissions markets, in the absence of other frictions. We also derive predictions about how prices should be reacting to new private or public information and show that the possibility of abatement dampens the impact of shocks on prices. Finally, we show that the information aggregation result breaks down if firms' abatement costs are also private information.
KW - emissions trading
KW - Information aggregation
KW - efficient market hypothesis
KW - price formation
M3 - Working paper
T3 - Economics Working Papers Series
BT - Information Aggregation in Emissions Markets with Abatement
PB - Lancaster University, Department of Economics
CY - Lancaster
ER -