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A Permit Allocation Contest for a Tradable Pollution Permit Market

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Author Info
Ian A. MacKenzie, () (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
Nick Hanley (Department of Economics, University of Stirling, Stirling, UK)
Tatiana Kornienko (Department of Economics, University of Edinburgh, Edinburgh, UK)

Additional information is available for the following registered author(s):

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

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

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Related research
Keywords: Rank-order contests pollution permits initial allocation

Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

This paper has been announced in the following NEP Reports:

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