NO : WP-2025-027
AUTHOR : Saurav Kumar, Taniya Ghosh, Shesadri Banerjee
TITLE : Macroeconomic Implications of Permit Market: Evidence from India’s Carbon Credit Trading Scheme
ABSTRACT :
We study how a carbon permit market shapes firm-level emission reduction incentives and aggregate environmental and macroeconomic outcomes. We develop a novel and tractable microeconomic framework in which firms endogenously decide whether to become a permit seller. We find that a higher previous period abatement or current green energy adoption increases a firm’s probability of becoming a permit seller but reduces equilibrium share of permit sellers as overall compliance improves, revealing a distinction between individual and aggregate participation. We embed this mechanism in an Environmental- Dynamic Stochastic General Equilibrium model of India’s emission intensity target policy. We find that it achieves energy transition at lower economic costs than a carbon tax. A stricter target and cheaper green energy can accelerate this transition. Finally, endogenous permit price adjustment accommodates shocks that increase fossil-fuel dependence from translating into higher fossil-fuel use, providing a novel stabilization mechanism for permit markets.
Keywords: E-DSGE, Permit market, Intensity target, Business cycle, Energy transition
JEL Code: E32, Q48, Q58, D47
Weblink: http://www.igidr.ac.in/pdf/publication/WP-2025-027.pdf
