Air Pollution Trading on the European CO2-Permit Market

Abstract

Market-based climate policy decentralizes abatement decisions via a carbon price, e.g. by establishing a permit market for CO2 emissions. Since CO2 emissions are often released jointly with conventional air pollutants, CO2 permit trades give rise to implicit trades of various co-pollutants. In contrast to CO2 emissions, co-pollution emissions are not traded on a ton-for-ton basis but they do have local environmental impacts. Depending on the spatial distribution of polluters and the polluted, these properties can lead to undesirable outcomes. We develop an empirical framework for measuring air pollution trades and evaluating their economic consequences. We apply this framework to provide the first estimates of the welfare and distributional consequences of co-pollution trades on the European carbon market. (Joint work with Dana Kassem and Ulrich Wagner).