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Tradable pollution permits in dynamic general equilibrium: can optimality and acceptability be reconciled?

  • BRECHET, Thierry

    ()

    (Université catholique de Louvain, CORE and Chair Lhoist Berghmans in Environmental Economics and Management, B-1348 Louvain-la-Neuve, Belgium)

  • JOUVET, Pierre - André

    (EconomiX, Université de Paris Ouest, Nanterre – La Défense, France)

  • ROTILLON, Gilles

    (EconomiX, Université de Paris Ouest, Nanterre – La Défense, France)

In this paper we study the optimal growth path and its decentralization in a two-sector overlapping- generations model with pollution. One sector (power generation) is polluting and the other (final good) is not. Pollution is regulated by tradable emission permits. The issue is whether the optimal growth path can be replicated in equilibrium with pollution permits, given that some permits must be issued free of charge for the sake of political acceptability. We provide a policy rule that allows optimality and acceptability to be reconciled.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2010056.

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Date of creation: 01 Oct 2010
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Handle: RePEc:cor:louvco:2010056
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  1. Michel, Philippe, 1990. "Some Clarifications on the Transversality Condition," Econometrica, Econometric Society, vol. 58(3), pages 705-23, May.
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  11. Thierry Bréchet & Pierre-André Jouvet & Gilles Rotillon, 2011. "Tradable pollution permits in dynamic general equilibrium: can optimality and acceptability be reconciled?," Working Papers 1102, Chaire Economie du Climat.
  12. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Jouvet, Pierre-Andre & Michel, Philippe & Rotillon, Gilles, 2005. "Optimal growth with pollution: how to use pollution permits?," Journal of Economic Dynamics and Control, Elsevier, vol. 29(9), pages 1597-1609, September.
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  19. Frank Hahn & Robert Solow, 1997. "A Critical Essay on Modern Macroeconomic Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 026258154x, June.
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