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Output and Abatement Effects of Allocation Readjustment in Permit Trade

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  • Sterner, Thomas
  • Muller, Adrian

Abstract

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.

Suggested Citation

  • Sterner, Thomas & Muller, Adrian, 2006. "Output and Abatement Effects of Allocation Readjustment in Permit Trade," Discussion Papers dp-06-49, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-06-49
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    References listed on IDEAS

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    Cited by:

    1. Bushnell, James & Chen, Yihsu, 2012. "Allocation and leakage in regional cap-and-trade markets for CO2," Resource and Energy Economics, Elsevier, vol. 34(4), pages 647-668.
    2. Frédéric Branger & Misato Sato, 2017. "Solving the clinker dilemma with hybrid output-based allocation," Climatic Change, Springer, vol. 140(3), pages 483-501, February.
    3. Paul, Anthony & Burtraw, Dallas & Palmer, Karen, 2008. "Compensation for Electricity Consumers Under a U.S. CO2 Emissions Cap," Discussion Papers dp-08-25, Resources For the Future.
    4. Coria, Jessica & Sterner, Thomas, 2008. "Tradable Permits in Developing Countries: Evidence from air pollution in Santiago, Chile," Working Papers in Economics 326, University of Gothenburg, Department of Economics.
    5. Yuanguang Yu, 2012. "An Optimal Ad Valorem Tax/Subsidy with an Output-Based Refunded Emission Payment for Permits Auction in an Oligopoly Market," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 52(2), pages 235-248, June.
    6. Rosendahl, Knut Einar, 2008. "Incentives and prices in an emissions trading scheme with updating," Journal of Environmental Economics and Management, Elsevier, vol. 56(1), pages 69-82, July.
    7. Golombek, Rolf & Kittelsen, Sverre A.C. & Rosendahl, Knut Einar, 2013. "Price and welfare effects of emission quota allocation," Energy Economics, Elsevier, vol. 36(C), pages 568-580.
    8. Dallas Burtraw & Karen Palmer, 2008. "Compensation rules for climate policy in the electricity sector," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(4), pages 819-847.
    9. Ambec, Stefan & Coria, Jessica, 2015. "Strategic environmental regulation of multiple pollutants," Working Papers in Economics 626, University of Gothenburg, Department of Economics.
    10. Bin Ye & Jingjing Jiang & Lixin Miao & Ji Li & Yang Peng, 2015. "Innovative Carbon Allowance Allocation Policy for the Shenzhen Emission Trading Scheme in China," Sustainability, MDPI, Open Access Journal, vol. 8(1), pages 1-23, December.
    11. Ambec, Stefan & Coria, Jessica, 2018. "Policy spillovers in the regulation of multiple pollutants," Journal of Environmental Economics and Management, Elsevier, vol. 87(C), pages 114-134.
    12. Rogge, Karoline S. & Linden, Christian, 2010. "Cross-country comparison of the replacement incentives of the EU ETS in 2008-12: the case of the power sector," Working Papers "Sustainability and Innovation" S1/2010, Fraunhofer Institute for Systems and Innovation Research (ISI).
    13. Christoph Weber & Philip Vogel, 2014. "Contingent certificate allocation rules and incentives for power plant investment and disinvestment," Journal of Regulatory Economics, Springer, vol. 46(3), pages 292-317, December.
    14. Schleich, Joachim & Rogge, Karoline S. & Betz, Regina, 2008. "Incentives for energy efficiency in the EU Emissions Trading Scheme," Working Papers "Sustainability and Innovation" S2/2008, Fraunhofer Institute for Systems and Innovation Research (ISI).
    15. Bushnell, James & Chen, Yihsu, 2009. "Regulation, Allocation and Leakage in Cap-And-Trade Markets for CO2," Staff General Research Papers Archive 13131, Iowa State University, Department of Economics.
    16. Johann Wackerbauer & Jutta Albrecht-Saavedra & Marc Gronwald & Janina Ketterer & Jana Lippelt & Johannes Pfeiffer & Luise Röpke & Markus Zimmer, 2011. "Bewertung der klimapolitischen Maßnahmen und Instrumente: eine Studie im Auftrag der E.ON AG," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 51, October.
    17. Hintermann, Beat, 2010. "Allowance price drivers in the first phase of the EU ETS," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 43-56, January.
    18. Evangelina Dardati, 2013. "Pollution Permit Systems and Firm Dynamics: Does the Allocation Scheme Matter?," ILADES-Georgetown University Working Papers inv294, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.

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    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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