Emission reduction and profit-neutral permit allocations |
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| Institution: | 1. Department of Economics, University of Pittsburgh, Wesley Posvar Hall, Pittsburgh, PA 15260, USA;2. School of Economics, University of Queensland, Colin Clark Building, St. Lucia, Brisbane, QLD 4072, Australia;1. University of Illinois at Urbana-Champaign and NBER, United States;2. Ohio University, United States;1. Department of Resource Economics, University of Massachusetts-Amherst, USA;2. Department of Economics, University of Alaska-Anchorage, USA;3. Institute for State Economy, Nankai University, China;4. School of Public and Environmental Affairs, Indiana University-Bloomington, USA;1. Research Economist, USDA Forest Service Pacific Southwest Research Station, USA;2. Department of Applied Economics, Oregon State University, USA;3. Bren School of Environmental Science & Management, University of California, Santa Barbara, USA;1. Department of Economics, University of Hagen, Universitätsstr. 41, 58097 Hagen, Germany;2. Department of Economics, University of Siegen, Unteres Schloss 3, 57072 Siegen, Germany |
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| Abstract: | The present paper addresses two policy objectives: to implement a market for pollution permits and to make regulation acceptable for businesses. Profit-neutral permit allocations are defined as the number of permits that the regulator should give for free so that post-regulation profits (i.e. a firm's profits in the products market plus the value of the allowances granted for free) are equal to pre-regulation profits. The proposed model is developed by assuming that firms use polluting technologies and compete “à la Cournot”. The paper demonstrates that a low number of free allowances is sufficient to meet these two goals. Moreover, the regulator can fully offset losses, even when the reduction in emissions is high, provided that the sectors concerned are not monopolies, both for isoelastic and linear demand functions. |
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| Keywords: | Pollution permits Cournot oligopoly EU-ETS F18 H2 L13 L51 Q2 |
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