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Tradable Carbon Permit Auctions: How and Why to Auction Not Grandfather

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  • Cramton, Peter
  • Kerr, Suzi

Abstract

An auction of carbon permits is the best way to achieve carbon caps set by international negotiation to limit global climate change. To minimize administrative costs, permits would be required at the level of oil refineries, natural gas pipe lines, liquid sellers, and coal processing plants. To maximize liquidity in secondary markets, permits would be fully tradable and bankable. The government would conduct quarterly auctions. A standard ascending-clock auction in which price is gradually raised until there is no excess demand would provide reliable price discovery. An auction is preferred to grandfathering (giving polluters permits in proportion to past pollution), because it allows reduced tax distortions, provides more flexibility in distribution of costs, provides greater incentives for innovation, and reduces the need for politically contentious arguments over the allocation of rents.

Suggested Citation

  • Cramton, Peter & Kerr, Suzi, 1998. "Tradable Carbon Permit Auctions: How and Why to Auction Not Grandfather," Discussion Papers 10668, Resources for the Future.
  • Handle: RePEc:ags:rffdps:10668
    DOI: 10.22004/ag.econ.10668
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    More about this item

    Keywords

    Environmental Economics and Policy;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels

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