Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 413: Output and Abatement Effects of Allocation Readjustment in Permit Trade
Adrian Muller () and Thomas Sterner
Additional contact information
Adrian Muller: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Department of Economics., School of Business, Economics and Law, Göteborg University, Box 640, SE 40530 GÖTEBORG
Thomas Sterner: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Department of Economics., School of Business, Economics and Law, Göteborg University, Box 640, SE 40530 GÖTEBORG
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.
Keywords: -
29 pages, December 8, 2009
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