A Permit Allocation Contest for a Tradable Pollution Permit Market
AbstractIn 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 InfoPaper 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.
Length: 41 pages
Date of creation: Mar 2008
Date of revision:
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:
- NEP-ALL-2008-03-08 (All new papers)
- NEP-DCM-2008-03-08 (Discrete Choice Models)
- NEP-ENE-2008-03-08 (Energy Economics)
- NEP-ENV-2008-03-08 (Environmental Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Hanley, Nicholas & Kornienko, Tatiana & Mackenzie, Ian A, 2008.
"Using contests to allocate pollution rights,"
Stirling Economics Discussion Papers
2008-21, University of Stirling, Division of Economics.
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