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Output and Abatement Effects of Allocation Readjustment in Permit Trade

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  • Sterner, Thomas
  • Muller, Adrian

Abstract

In permit trading systems, free initial allocation is common practice. A recent example is the European Union Greenhouse Gas Emission Trading Scheme (EU-ETS). We investigate effects of different free allocation schemes on incentives and identify significant perverse effects on abatement and output employing a simple multi-period model. Firms have incentives for strategic action if allocation in one period depends on their actions in previous ones and thus can be influenced by them. These findings play a major role where trading schemes become increasingly popular as environmental or resource use policy instruments. This is of particular relevance in the EU-ETS, where the current period is a trial-period before the first commitment period of the Kyoto protocol. Finally, this paper fills a gap in the literature by establishing a consistent terminology for initial allocation.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-06-49.

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Date of creation: 26 Oct 2006
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Handle: RePEc:rff:dpaper:dp-06-49

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  1. Burtraw, Dallas & Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Discussion Papers, Resources For the Future dp-98-22, Resources For the Future.
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  16. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2001. "The Effect of Allowance Allocation on the Cost of Carbon Emission Trading," Discussion Papers, Resources For the Future dp-01-30-, Resources For the Future.
  17. Fischer, Carolyn, 2003. "Combining Rate-Based and Cap-and-Trade Emissions Policies," Discussion Papers, Resources For the Future dp-03-32, Resources For the Future.
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Citations

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Cited by:
  1. Bushnell, James & Chen, Yihsu, 2009. "Regulation, Allocation and Leakage in Cap-And-Trade Markets for CO2," Staff General Research Papers 13131, Iowa State University, Department of Economics.
  2. Coria, Jessica & Sterner, Thomas, 2008. "Tradable Permits in Developing Countries: Evidence from air pollution in Santiago, Chile," Working Papers in Economics 326, University of Gothenburg, Department of Economics.
  3. Schleich, Joachim & Rogge, Karoline S. & Betz, Regina, 2008. "Incentives for energy efficiency in the EU Emissions Trading Scheme," Working Papers "Sustainability and Innovation" S2/2008, Fraunhofer Institute for Systems and Innovation Research (ISI).
  4. Beat Hintermann, 2009. "Allowance Price Drivers in the First Phase of the EU ETS," CEPE Working paper series, CEPE Center for Energy Policy and Economics, ETH Zurich 09-63, CEPE Center for Energy Policy and Economics, ETH Zurich.
  5. Evangelina Dardati, 2013. "Pollution Permit Systems and Firm Dynamics: Does the Allocation Scheme Matter?," ILADES-Georgetown University Working Papers, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines inv294, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  6. Yuanguang Yu, 2012. "An Optimal Ad Valorem Tax/Subsidy with an Output-Based Refunded Emission Payment for Permits Auction in an Oligopoly Market," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 52(2), pages 235-248, June.
  7. Rolf Golombek & Sverre A.C. Kittelsen & Knut Einar Rosendahl, 2011. "Price and welfare effects of emission quota allocation," Discussion Papers 661, Research Department of Statistics Norway.
  8. Paul, Anthony & Burtraw, Dallas & Palmer, Karen, 2008. "Compensation for Electricity Consumers Under a U.S. CO2 Emissions Cap," Discussion Papers, Resources For the Future dp-08-25, Resources For the Future.
  9. Bushnell, James & Chen, Yihsu, 2010. "Allocation and Leakage in Regional Cap-And-Trade Markets for CO2," Staff General Research Papers 31804, Iowa State University, Department of Economics.
  10. Rogge, Karoline S. & Linden, Christian, 2010. "Cross-country comparison of the replacement incentives of the EU ETS in 2008-12: the case of the power sector," Working Papers "Sustainability and Innovation" S1/2010, Fraunhofer Institute for Systems and Innovation Research (ISI).
  11. Johann Wackerbauer & Jutta Albrecht-Saavedra & Marc Gronwald & Janina Ketterer & Jana Lippelt & Johannes Pfeiffer & Luise Röpke & Markus Zimmer, 2011. "Bewertung der klimapolitischen Maßnahmen und Instrumente: eine Studie im Auftrag der E.ON AG," ifo Forschungsberichte, Ifo Institute for Economic Research at the University of Munich, number 51, 9.
  12. Dallas Burtraw & Karen Palmer, 2008. "Compensation rules for climate policy in the electricity sector," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(4), pages 819-847.

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