Emissions Trading System and Supporting Policies under an Emissions Reduction Framework

This paper, through building mathematical models, makes an analysis on the emissions trading system under an abatement framework. And the authors obtained four conclusions: (1) The impact by environmental taxes on the existing firms’ choices of optimal discharging amounts is uncertain, the existing firms’ discharging amounts will be on the decrease with the increased prices of emissions permits, and paid initial emissions allowances will reduce the existing firms’ profits; (2) Under an intertemporal trading system, the existing firms’ holding the permits conforms to the principle of profit maximization; (3) Under the intertemporal trading system, the prices for emissions permits for the entrant firms are always on the rise and so are their access costs into the industries, thus frustrating local governments’ efforts in attracting investments; and (4) Emissions reduction policies are good regulatory instruments for promoting local economic welfare and realizing sustainable development. The paper also gives some suggestions for triggering and activating the emissions trading system and formulating supportive policies.