Prices vs. Quantities: Ex-Post Efficiency through Open Market Operations in Permit Markets

In this paper, we show that a price-regulated market for tradable permits improves upon an unregulated market and upon an emission tax, when there is uncertainty about abatement costs. We derive a scheme of open market operations that allows to achieve ex-post efficiency and analyze its effects on the expected profits of the regulated firms and the expected revenue of the regulator. For the case when the efficient price regulation is seen as being too complicated for implementation, we show that even the enforcement of simple price limits can improve expected social welfare.