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Differentiating Permit Allocation Across Areas

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  • Jean-Philippe Nicolaï
  • Jorge Zamorano

Abstract

This paper addresses the issue of differentiating permit allocation across areas, this being linked to the possibility of firms to relocate. Two different areas are considered: a domestic area where a cap-and-trade system is implemented and a foreign area where there is no environmental regulation. In addition, the domestic area is divided into a "coastal area", close to the border and an "inland area", further from the border. The conditions under which welfare decreases with relocation are determined. In such a case, free allowances may be used to prevent firms from relocating. One option to minimize the cost of preventing firms from relocating could be to differentiate permit allocation across areas. However, differentiating subsidies in the same sector is a politically sensitive initiative and the competition authorities may be reluctant to implement such a policy. Nevertheless, the paper shows that the firms that receive less allowances would also benefit from the subsidies granted to the other firms. Indeed, we demonstrate that in such a context the relocation of domestic firms to a foreign country reduces the profits of the remaining domestic firms. JEL Codes: L13, Q53, Q58. Keywords: Relocation, Imperfect Competition, Environmental Regulation.

Suggested Citation

  • Jean-Philippe Nicolaï & Jorge Zamorano, 2018. "Differentiating Permit Allocation Across Areas," Annals of Economics and Statistics, GENES, issue 132, pages 105-128.
  • Handle: RePEc:adr:anecst:y:2018:i:132:p:105-128
    DOI: 10.15609/annaeconstat2009.132.0105
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    File URL: https://www.jstor.org/stable/10.15609/annaeconstat2009.132.0105
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    Cited by:

    1. Julie Ing & Jean-Philippe Nicolai, 2019. "Dirty versus Clean Firms’ Relocation under International Trade and Imperfect Competition," CER-ETH Economics working paper series 19/319, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

    More about this item

    Keywords

    Relocation; Imperfect Competition; Environmental Regulation.;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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