IDEAS home Printed from https://ideas.repec.org/p/ila/ilades/inv294.html
   My bibliography  Save this paper

Pollution Permit Systems and Firm Dynamics: Does the Allocation Scheme Matter?

Author

Abstract

Most cap-and-trade systems allocate permits for free. However, they differ dependent on whether closing plants and new entrants get free permits. I use a dynamic model with heterogeneous firms and equilibrium conditions in the output and emission market to quantify the effect on exit/entry, investment and welfare of different allocation rules. I calibrate the model with data from the power plants participating in the US SO2 program and quantify the effects of two allocation schemes: The US SO2 case, in which closing plants keep their permits and new entrants do not get any of them; The EU-ETS case, in which plants lose permits upon exit and new entrants get allowances. If the US switched to the EU-ETS allocation scheme, the price of output would be 1:5% lower, the price of permits 7.6% higher, and there would be a distribution of dirtier and less productive plants. Consumers are better off if the US switched to the EU-ETS system (lower price), while producers are better off with the US SO2 system (higher profits).

Suggested Citation

  • Evangelina Dardati, 2013. "Pollution Permit Systems and Firm Dynamics: Does the Allocation Scheme Matter?," ILADES-UAH Working Papers inv294, Universidad Alberto Hurtado/School of Economics and Business.
  • Handle: RePEc:ila:ilades:inv294
    as

    Download full text from publisher

    File URL: http://fen.uahurtado.cl/wp-content/uploads/2010/07/I-294.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Sterner, Thomas & Muller, Adrian, 2006. "Output and Abatement Effects of Allocation Readjustment in Permit Trade," Discussion Papers dp-06-49, Resources For the Future.
    2. Curtis Carlson & Dallas Burtraw & Maureen Cropper & Karen L. Palmer, 2000. "Sulfur Dioxide Control by Electric Utilities: What Are the Gains from Trade?," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1292-1326, December.
    3. Goulder, Lawrence H. & Parry, Ian W. H. & Williams III, Roberton C. & Burtraw, Dallas, 1999. "The cost-effectiveness of alternative instruments for environmental protection in a second-best setting," Journal of Public Economics, Elsevier, vol. 72(3), pages 329-360, June.
    4. Meredith Fowlie & Mar Reguant & Stephen P. Ryan, 2016. "Market-Based Emissions Regulation and Industry Dynamics," Journal of Political Economy, University of Chicago Press, vol. 124(1), pages 249-302.
    5. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 53-82.
    6. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
    7. Paul, Anthony & Myers, Erica & Palmer, Karen, 2009. "A Partial Adjustment Model of U.S. Electricity Demand by Region, Season, and Sector," Discussion Papers dp-08-50, Resources For the Future.
    8. Jensen, Jesper & Rasmussen, Tobias N., 2000. "Allocation of CO2 Emissions Permits: A General Equilibrium Analysis of Policy Instruments," Journal of Environmental Economics and Management, Elsevier, vol. 40(2), pages 111-136, September.
    9. A. Denny Ellerman, 2008. "New Entrant and Closure Provisions: How do they Distort?," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 63-76.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ila:ilades:inv294. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mauricio Tejada). General contact details of provider: http://edirc.repec.org/data/deilacl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.