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Output-based allocations in pollution markets with uncertainty and self-selection

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  • Meunier, Guy
  • Montero, Juan-Pablo
  • Ponssard, Jean-Pierre

Abstract

We study pollution permit markets in which a fraction of permits are allocated to firms based on their output. Output-based allocations, which are receiving increasing attention in the design of carbon markets around the world (e.g., Europe, California, New Zealand), are shown to be optimal under demand and supply volatility despite the output distortions they may create. In a market that covers multiple sectors, the optimal design combines auctioned permits with output-based allocations that are specific to each sector and increasing in its volatility. When firms are better informed about the latter or must self select, the regulator resorts to some free (i.e., lump-sum) allocations to sort firms out.

Suggested Citation

  • Meunier, Guy & Montero, Juan-Pablo & Ponssard, Jean-Pierre, 2018. "Output-based allocations in pollution markets with uncertainty and self-selection," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 832-851.
  • Handle: RePEc:eee:jeeman:v:92:y:2018:i:c:p:832-851
    DOI: 10.1016/j.jeem.2017.10.001
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    3. Wang, Banban & Pizer, William A. & Munnings, Clayton, 2022. "Price limits in a tradable performance standard," Journal of Environmental Economics and Management, Elsevier, vol. 116(C).
    4. Gregor Zoettl, 2021. "Emission trading systems and the optimal technology mix," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 12(2), pages 281-327, June.
    5. Zaklan, Aleksandar & Wachsmuth, Jakob & Duscha, Vicki, 2021. "The EU ETS to 2030 and beyond: adjusting the cap in light of the 1.5°C target and current energy policies," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 21(6), pages 778-791.
    6. Aleksandar Zaklan, 2023. "Coase and Cap-and-Trade: Evidence on the Independence Property from the European Carbon Market," American Economic Journal: Economic Policy, American Economic Association, vol. 15(2), pages 526-558, May.
    7. Kollenberg, Sascha & Taschini, Luca, 2019. "Dynamic supply adjustment and banking under uncertainty in an emission trading scheme: The market stability reserve," European Economic Review, Elsevier, vol. 118(C), pages 213-226.
    8. Reyer Gerlagh & Roweno J.R.K. Heijmans, 2018. "Regulating Stock Externalities," CESifo Working Paper Series 7383, CESifo.
    9. Dardati, Evangelina & Saygili, Meryem, 2020. "Aggregate impacts of cap-and-trade programs with heterogeneous firms," Energy Economics, Elsevier, vol. 92(C).
    10. Meunier, Guy & Montero, Juan-Pablo & Ponssard, Jean-Pierre, 2017. "Using output-based allocations to manage volatility and leakage in pollution markets," Energy Economics, Elsevier, vol. 68(S1), pages 57-65.
    11. Wang, Ge & Zhang, Qi & Li, Yan & Mclellan, Benjamin C., 2019. "Efficient and equitable allocation of renewable portfolio standards targets among China's provinces," Energy Policy, Elsevier, vol. 125(C), pages 170-180.
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    13. René Aïd & Sara Biagini, 2023. "Optimal dynamic regulation of carbon emissions market," Mathematical Finance, Wiley Blackwell, vol. 33(1), pages 80-115, January.
    14. Cao, Jing & Ho, Mun S. & Ma, Rong & Teng, Fei, 2021. "When carbon emission trading meets a regulated industry: Evidence from the electricity sector of China," Journal of Public Economics, Elsevier, vol. 200(C).

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    More about this item

    Keywords

    Pollution markets; Output-based allocations; Market volatility; Rent-seeking; Self-selection; Climate policy;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L74 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Construction

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