Pollution Permit Systems and Firm Dynamics: Does the Allocation Scheme Matter?
AbstractMost cap-and-trade systems allocate permits for free. However, they differ dependent on whether closing plants and new entrants get free permits. I use a dynamic model with heterogeneous firms and equilibrium conditions in the output and emission market to quantify the effect on exit/entry, investment and welfare of different allocation rules. I calibrate the model with data from the power plants participating in the US SO2 program and quantify the effects of two allocation schemes: The US SO2 case, in which closing plants keep their permits and new entrants do not get any of them; The EU-ETS case, in which plants lose permits upon exit and new entrants get allowances. If the US switched to the EU-ETS allocation scheme, the price of output would be 1:5% lower, the price of permits 7.6% higher, and there would be a distribution of dirtier and less productive plants. Consumers are better off if the US switched to the EU-ETS system (lower price), while producers are better off with the US SO2 system (higher profits).
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Bibliographic InfoPaper provided by Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines in its series ILADES-Georgetown University Working Papers with number inv294.
Length: 45 pages
Date of creation: Mar 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-AGR-2013-12-15 (Agricultural Economics)
- NEP-ALL-2013-12-15 (All new papers)
- NEP-ENE-2013-12-15 (Energy Economics)
- NEP-ENV-2013-12-15 (Environmental Economics)
- NEP-REG-2013-12-15 (Regulation)
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