The air pollution emission permits market in the EU and moral hazard
The European Environmental Agency (EEA) assigns periodically air pollution emission rights among the EC member states, who, in turn, share their respective endowment among the polluting firms. There exists a moral hazard problem since the EEA does not observe abatement efforts. We propose a theoretical model to analyze the effects that a market for emission rights has on the abatement efforts that the different firms undertake to reduce pollution. Moreover, we analyze how different environmental policies induce different abatement efforts
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