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

Author

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  • Guy Meunier

    (ALISS - Alimentation et sciences sociales - INRA - Institut National de la Recherche Agronomique, X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique)

  • Juan-Pablo Montero

    (PUC - Departamento de Economia, Pontificia Universidad Católica de Chile - UC - Pontificia Universidad Católica de Chile)

  • Jean-Pierre Ponssard

    (CNRS - Centre National de la Recherche Scientifique, X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique)

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 resort to some free (i.e., lump-sum) allocations to sort firms out. Numerical exercises illustrate the policy relevance of our results: the gains from considering output-based allocations can be substantial.

Suggested Citation

  • Guy Meunier & Juan-Pablo Montero & Jean-Pierre Ponssard, 2016. "Output-based allocations in pollution markets with uncertainty and self-selection," Working Papers hal-01321372, HAL.
  • Handle: RePEc:hal:wpaper:hal-01321372
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01321372
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    Cited by:

    1. Aleksandar Zaklan & Jakob Wachsmuth & Vicki Duscha, 2021. "The EU ETS to 2030 and beyond: adjusting the cap in light of the 1.5°C target and current energy policies," Climate Policy, Taylor & Francis Journals, vol. 21(6), pages 778-791, July.
    2. Lange, Ian & Maniloff, Peter, 2021. "Updating allowance allocations in cap-and-trade: Evidence from the NOx Budget Program," Journal of Environmental Economics and Management, Elsevier, vol. 105(C).
    3. Dardati, Evangelina & Saygili, Meryem, 2020. "Aggregate impacts of cap-and-trade programs with heterogeneous firms," Energy Economics, Elsevier, vol. 92(C).
    4. Philippe Quirion, 2021. "Output-Based Allocation and Output-Based Rebates: A survey," Policy Papers 2021.01, FAERE - French Association of Environmental and Resource Economists.
    5. 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.
    6. Aleksandar Zaklan, 2021. "Coase and Cap-and-Trade: Evidence on the Independence Property from the European Carbon Market," Discussion Papers of DIW Berlin 1925, DIW Berlin, German Institute for Economic Research.
    7. 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.
    8. Cathrine Hagem & Michael Hoel & Thomas Sterner, 2020. "Refunding Emission Payments: Output-Based Versus Expenditure-Based Refunding," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 77(3), pages 641-667, November.
    9. 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).
    10. Aleksandar Zaklan & Jakob Wachsmuth & Vicki Duscha, 2021. "The EU ETS to 2030 and beyond: adjusting the cap in light of the 1.5°C target and current energy policies," Climate Policy, Taylor & Francis Journals, vol. 21(6), pages 778-791, July.

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    More about this item

    Keywords

    pollution markets; output-based allocations; market volatility; selfselection; 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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