Banking and backloading emission permits.

Summary In this article we focus on carbon price dynamics, more speci…cally the impact of a policy envisaged by the European Commission to increase the CO2 price. This policy consists of removing a share of the allowances allocated for a period in order to reallocate some or all of them during the following period. To analyze the impact of this backloading we determine the CO2 market equilibrium with and without the policy, considering not only the market for permits but also the output market of regulated sectors. We propose a two-period model without uncertainty, where the market for permits is perfectly competitive, and the output market can be either com- petitive or oligopolistic. First, we de…ne the condition for which banking from one period to another is optimal. This condition, that is the absence of arbitrage opportunities (AOA), depends on not only from the per period initial allocation but also on production market fundamentals. When this condition is satisfi…ed, the market for emission is shown intertemporally efficient. Second, we show that the “back-loading”policy may be such that theAOA is no longer veri…ed and thus create inefficiencies or being ineffective.