Pollution Permit Markets with Intertemporal Trading and Asymmetric Information

We consider the problem of determining the permit discount rate in pollution permit markets in which permits may be traded over time and polluting firms have better information about their abatement costs than does the regulator. We show that the preferred permit discount rate may be greater than or less than the money discount rate. We also consider whether or not the regulator should allow intertemporal trading to take place. Allowing intertemporal trading lowers social costs when the slope of the marginal damage function is less than the slope of the aggregate marginal abatement cost function.