Emissions trading and profitability: The Swedish pulp and paper industry

The purpose of this paper is to develop models with and without potential e missions 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 Fare et al. (1992). It is relative to this model that industry profit is computed. This profit is compared to the prof it without emissions trading to give an estimate of the potential gains tha t can be realised by allowing for emissions trading. The model, which is ap plied to data for the Swedish pulp and paper industry, suggests that this i ndustry would have had up to 6% (1%) higher profits in 1989 (1990) if emiss ions trading had been used instead of individual permits to achieve the sam e total emissions target. Currently there is no permit trading in this indu stry so our results only model the potential gains that can be made.