Baseline-and-credit emission permit trading

The classic analysis assumes that the regulatory authority sets an aggregate cap on emissions from a set of sources and then divides the cap into a number of tradable permits (frequently called allowances), each of which authorizes the discharge of a unit quantity of emis- sions. [...] The effect is to limit aggregate 2 emissions to an implicit cap equal to the sum of the individual baselines. [...] Baseline-and-credit plans are theoretically equivalent to a cap-and-trade plan if the cap implicit in the baseline-and-credit plan is fixed and numerically equal to the fixed cap in a cap-and-trade plan. [...] The investigation seeks to confirm the prediction that the outcome of the two approaches would be the same when the output subsidy inherent to the baseline-and-credit plan can not possibly lead to productive expansion. [...] In the baseline-and-credit treatment we imposed a tradable performance standard of 5, equivalent to the average emission intensity in the cap-and-trade treatment.