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A Permit Allocation Contest for a Tradable Pollution Permit Market

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Abstract

In this paper we advocate a new initial allocation mechanism for a tradable pollution permit market. We outline a Permit Allocation Contest (PAC) that distributes permits to firms based on their rank relative to other firms. This ranking is achieved by ordering firms based on an observable 'external action' where the external action is an activity or characteristic of the firm that is independent of their choice of emissions in the tradeable permit market. We show that this mechanism efficiently allocates permits and, as a result, the tradeable permit market is cost-effective. We determine the symmetric equilibrium strategy of each firm in choosing their external action and find the choice is influenced by the firm's cost structure and the regulator's choice of permit allocation schedule (distribution of permits to the market). Furthermore, we investigate the factors that determine the regulator's choice of optimal permit allocation schedules.

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Bibliographic Info

Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 08/82.

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Length: 41 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:eth:wpswif:08-82

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Related research

Keywords: Rank-order contests; pollution permits; initial allocation;

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References

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  1. Ian Mackenzie & Nick Hanley & Tatiana Kornienko, 2008. "The optimal initial allocation of pollution permits: a relative performance approach," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 39(3), pages 265-282, March.
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Cited by:
  1. MacKenzie, Ian A. & Hanley, Nick & Kornienko, Tatiana, 2009. "Using contests to allocate pollution rights," Energy Policy, Elsevier, vol. 37(7), pages 2798-2806, July.

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