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Rent Seeking over Tradable Emission Permits

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  • Ashwin Rode

    (University of Chicago)

Abstract

The allocation of emission permits at no cost during the establishment of a cap-and-trade program creates opportunities for rent-seeking. I examine the consequences of such rent-seeking by exploiting an unusual feature of the UK’s permit allocation procedure in Phase 1 of the EU’s CO $$_{2}$$ 2 Emissions Trading Scheme, whereby it is possible to observe both a firm’s actual permit allocation as well as an earlier, technocratically-based provisional allocation that was never implemented. Firms had the opportunity to appeal their provisional allocation. I find that a firm’s financial connections to members of the House of Commons strongly predict its post-appeal allocation. Even after controlling for the provisional allocation, along with industry and financial characteristics, a connection to an additional member is associated with a significant increase in a firm’s actual permit allocation. Using results from a contest-theoretic framework, I estimate the welfare loss from rent-seeking to be over 100 million euros—a significant amount relative to the abatement costs firms incurred to reduce emissions.

Suggested Citation

  • Ashwin Rode, 2021. "Rent Seeking over Tradable Emission Permits," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 78(2), pages 257-285, February.
    • Handle: RePEc:kap:enreec:v:78:y:2021:i:2:d:10.1007_s10640-020-00531-z
    DOI: 10.1007/s10640-020-00531-z
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    Cited by:

    1. Alex Dickson & Ian A. MacKenzie, 2022. "Permit Markets with Political and Market Distortions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(1), pages 227-255, May.
    2. Wang, Xu & Zhu, Lei & Liu, Pengfei, 2021. "Manipulation via endowments: Quantifying the influence of market power on the emission trading scheme," Energy Economics, Elsevier, vol. 103(C).
    3. Bruno Bosco, 2023. "Trade, equilibrium prices and rents in European auctions for emission allowances," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 25(1), pages 87-113, January.

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    More about this item

    Keywords

    Rent seeking; Environmental economics; Tradable permits; Political connections;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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