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Output and Abatement Effects of Allocation Readjustment in Permit Trade

  • Muller, Adrian


    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Sterner, Thomas

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

In permit trading systems, free initial allocation is common practice. A recent example is the European Union Greenhouse Gas Emission Trading Scheme (EU-ETS). We investigate effects of different free allocation schemes on incentives and identify significant perverse effects on abatement and output employing a simple multi-period model. Firms have incentives for strategic action if allocation in one period depends on their actions in previous ones and thus can be influenced by them. These findings play a major role where trading schemes become increasingly popular as environmental or resource use policy instruments. This is of particular relevance in the EU-ETS, where the current period is a trial-period before the first commitment period of the Kyoto protocol. Finally, this paper fills a gap in the literature by establishing a consistent terminology for initial allocation.

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Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 413.

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Length: 29 pages
Date of creation: 08 Dec 2009
Date of revision:
Handle: RePEc:hhs:gunwpe:0413
Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
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