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On Multi-Period Allocation Of Tradable Emission Permits

  • Katrin Rehdanz
  • Richard S.J. Tol


    (Economic and Social Research Institute, Dublin)

TEconomic analysis of emission permit markets, and particularly of the initial permit allocation, have concentrated largely on static approaches. This is somewhat unsatisfactory as the allocation method in subsequent commitment periods may influence the behaviour of the market participants in the current period. For instance, some advocate a system of “rolling grandfathering”, in which later period allocations would be based on the actual (rather than allotted) emissions in earlier periods. Alternatively, emission permits can be allocated on the basis of the distance between actual and desired emission intensities in previous periods. This paper analyses the dynamic aspects of allocating greenhouse gas emission rights for different approaches using multi-player/two-period models. We show that different future allocation approaches create different strategic incentives at present, and that the permit market may partially or completely offset these incentives. We also demonstrate under what circumstances dynamic allocation rules create incentives to (lobby for) accelerating or decelerating emission reduction paths. Allowing for intertemporal transfer of abatement activities (banking and borrowing), the net present costs can be reduced. However, whether banking or borrowing is beneficial for a company depends not only on their own abatement costs and that of other companies trading permits on the market, but also on the allocation mechanism implemented.

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Paper provided by Research unit Sustainability and Global Change, Hamburg University in its series Working Papers with number FNU-43.

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Length: 27 pages
Date of creation: Apr 2004
Date of revision: Apr 2004
Publication status: Forthcoming, Tulkens (ed.)
Handle: RePEc:sgc:wpaper:43
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  1. VAN STEENBERGHE, Vincent, 2003. "CO2 abatement costs and permits price : Exploring the impact of banking and the role of future commitments," CORE Discussion Papers 2003098, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2002. "The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances," The Electricity Journal, Elsevier, vol. 15(5), pages 51-62, June.
  3. Cramton, Peter & Kerr, Suzi, 2002. "Tradeable carbon permit auctions: How and why to auction not grandfather," Energy Policy, Elsevier, vol. 30(4), pages 333-345, March.
  4. Rehdanz, Katrin & Tol, Richard S.J., 2005. "Unilateral regulation of bilateral trade in greenhouse gas emission permits," Ecological Economics, Elsevier, vol. 54(4), pages 397-416, September.
  5. Robert N. Stavins, 1998. "What Can We Learn from the Grand Policy Experiment? Lessons from SO2 Allowance Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 69-88, Summer.
  6. Reimund Schwarze & Peter Zapfel, 2000. "Sulfur Allowance Trading and the Regional Clean Air Incentives Market: A Comparative Design Analysis of two Major Cap-and-Trade Permit Programs?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 17(3), pages 279-298, November.
  7. Böhringer, Christoph & Lange, Andreas, 2003. "On the Design of Optimal Grandfathering Schemes for Emission Allowances," ZEW Discussion Papers 03-08, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  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. Woerdman, Edwin, 2000. "Organizing emissions trading: the barrier of domestic permit allocation," Energy Policy, Elsevier, vol. 28(9), pages 613-623, July.
  10. Edwards, T. Huw. & Hutton, John P., 2001. "Allocation of carbon permits within a country: a general equilibrium analysis of the United Kingdom," Energy Economics, Elsevier, vol. 23(4), pages 371-386, July.
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