Emissions Trading and Profitability: The Swedish Pulp and Paper Industry

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The purpose of this paper is to develop models with and without potential emissions trading and to compare industry profits under the two regimes. The model in which emissions trading is permitted is a nonparametric industry frontier model in the spirit of Färe et al. (1992). It is relative to this model that industry profit is computed. This profit is compared to the profit without emissions trading to give an estimate of the potential gains that can be realised by allowing for emissions trading. The model, which is applied to data for the Swedish pulp and paper industry, suggests that this industry would have had up to 6% (1%) higher profits in 1989 (1990) if emissions trading had been used instead of individual permits to achieve the same total emissions target. Currently there is no permit trading in this industry so our results only model the potential gains that can be made.

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