Personal Carbon Trading and Equilibrium Permit Price for Road Transport

Abstract

The implementation of personal carbon trading (PCT) on transport mode choice has recently been considered in the literature in order to mitigate CO_2 emissions. This paper focuses on the importance of analyzing the consequences of application of the scheme, thus it examines the differences between the initial equilibrium state and the long-run equilibrium state. The initial equilibrium price is set after the policy employment, and then this price is put on the cost of using carbon-intensive mode. This additional price leads to demand less carbon-intensive modes. The decrease in the demand decreases the price of permits then an iteration of prices and the demand for carbon-intensive modes starts. The long-run equilibrium price is achieved after this iteration ends. The model is formulated for various modes with various origin and destination pairs (O-Ds) and the example problem is illustrated for 2 modes with 1 O-D. The equilibrium price setting is formulated by optimization tool to maximize utility. The changes in the demand for transport modes are demonstrated by the logistic distribution. By using an algorithm, the long-run equilibrium price is derived and the analysis of distributional effects is evaluated. In the long-run equilibrium state, 41% decrease from initial equilibrium price, 36% increase in automobile demand, and 4% increase in welfare are observed. Of those 4%, surplus for under-emitters, who are regarded as relatively lower income earners, increased by 5%, whereas surplus for over-emitters only increased by 3%. Thus the feature of progressivity still remains after the implementation of the policy. Since the significant changes are still observed after the application of the policy, long-run state should be considered in the PCT analysis in the future.