AN ECONOMIC ANALYSIS OF THE EMISSION REDUCTION MARKET SYSTEM IN CHICAGO

Abstract

A mixed-integer programming model is used to investigate economic impacts of the permit trading market in Chicago and determine the equilibrium price. Unlike previous studies, the model determines unit pollution abatement cost endogenously depending on firms' technology adoption decisions. A sequential trading process is used to simulate firms' behavior under incomplete information. The results show that average shadow prices, a counterpart of conventional shadow prices in discrete problems, slightly underestimate the equilibrium prices. Moreover, the model predicts an over-supply of permits for the first two trading seasons.mixed-integer programming, ERMS, average shadow price, pollution permit, Environmental Economics and Policy,