Cap-and-Trade Programs under Delayed Compliance: Consequences of Interim Injections of Permits * Makoto Hasegawa † Stephen Salant ‡ July 7, 2014 Abstract Virtually every analysis of cap-and-trade programs assumes that firms must sur- render permits as they pollute. However, no program, existing or proposed, requires such continual compliance. Some (e.g. the Acid Rain Program limiting SO 2 emissions) require compliance once a year; others (e.g. the Regional Greenhouse Gas Initiative limiting CO 2 emissions) require compliance every three years. The paths of emissions and permit prices would be invariant to compliance timing (Holland-Moore, 2013) if the government never injected additional permits between successive compliance dates. However, virtually all emissions trading programs require such injections through ei- ther (1) interim permit auctions or (2) sales from “cost containment reserves” intended to cap permit prices. In such cases, analyses which abstract from delayed compliance may mislead policy makers. For example, a cost containment reserve judged sufficient to cap prices at a ceiling over a year may sell out in a single day. * We thank Andrew Stocking for alerting us to the delayed compliance provision and Soren Anderson for circulating an earlier draft of our paper to Stephen Holland and others concerned with AB-32. Sev- erin Borenstein, Dallas Burtraw, Christopher Costello, Harrison Fell, Charles Kolstad, Gary Libecap, Carol McAusland, Michael Moore, and Matthew Zaragoza-Watkins provided helpful comments on an earlier draft. We thank the co-editor, Lucas Davis, and the anonymous referees of this journal for constructive sugges- tions that have greatly improved the paper. Hasegawa acknowledges the financial support provided by the Nakajima Foundation and the Yamada Academic Research Fund. Salant completed this research while in residence at Santa Barbara’s Bren School as a UCE3 Senior Fellow. † National Graduate Institute for Policy Studies (GRIPS). E-mail: m-hasegawa@grips.ac.jp. ‡ Department of Economics, University of Michigan and Resources for the Future. E-mail: ssalant@umich.edu.