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Initial Allocation of Emissions Permits in the Two-Sided Matching Framework

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Abstract

For the initial allocation of emissions permits, auctioning has been theoretically the most preferred allocation mechanism; but to attract the participation of polluting industries these permits have been generally grandfathered. Following two-sided matching literature, we model an auction market for emissions permits as a two-sided matching procedure and based on the objectives of all the players, characterize a set of stable matching rules that lead to the core allocation. We show that matching based allocation mechanism retains the essence of grandfathering by keeping the reservation price for permits at zero, by giving firms more maneuvering space in auctioning and also by rewarding more environmentally efficient firms and are thus more suitable for the emissions markets.

Suggested Citation

  • Amlendu Kumar Dubey, 2010. "Initial Allocation of Emissions Permits in the Two-Sided Matching Framework," Journal of Quantitative Economics, The Indian Econometric Society, vol. 8(1), pages 95-104, January.
    • Handle: RePEc:jqe:jqenew:v:8:y:2010:i:1:p:95-104
    Note: This paper is a part of my M. Phil. dissertation submitted to the India Gandhi Institute of Development Research (IGIDR), Mumbai, India. I am grateful to Dr. P. G. Babu, Dr. Johan Albrecht and to Dr. Toke Aidt for their useful comments and suggestions, and also to an anonymous referee whose comments improved the content of this paper. All the errors and omissions are mine.
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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