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Pollution Permit Systems And Firm Dynamics: How Does The Allocation Scheme Matter?

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  • Evangelina Dardati

Abstract

I use a firm dynamics model to compare two permit allocation schemes commonly used in pollution permit systems. In the first, closing plants keep their permits, and new entrants do not get them, whereas in the second, closing plants lose their permits, and new entrants get free allowances. Calibrating the model with data from power plants participating in the U.S. SO2 program, I find that, compared to the first scheme, in the second arrangement, (i) plants stay, on average, 3.6 years longer and (ii) although the aggregate emission rate is lower, the plant distribution displays more dirty and low‐productivity plants.

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  • Evangelina Dardati, 2016. "Pollution Permit Systems And Firm Dynamics: How Does The Allocation Scheme Matter?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(1), pages 305-328, February.
    • Handle: RePEc:wly:iecrev:v:57:y:2016:i:1:p:305-328
    DOI: 10.1111/iere.12157
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