Mackenzie, I. A., Hanley, N. and Kornienko, T. (2008) The optimal initial allocation of pollution permits: a relative performance approach. Environmental and Resource Economics, 39(3), pp. 265-282. (doi: 10.1007/s10640-007-9125-4)
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Abstract
The initial allocation of pollution permits is an important aspect of emissions trading schemes. We generalize the analysis of Böhringer and Lange (2005, Eur Econ Rev 49(8): 2041–2055) to initial allocation mechanisms that are based on inter-firm relative performance comparisons (including grandfathering and auctions, as well as novel mechanisms). We show that using firms’ historical output for allocating permits is never optimal in a dynamic permit market setting, while using firms’ historical emissions is optimal only in closed trading systems and only for a narrow class of allocation mechanisms. Instead, it is possible to achieve social optimality by allocating permits based only on an external factor, which is independent of output and emissions. We then outline sufficient conditions for a socially optimal relative performance mechanism.
| Item Type: | Articles |
|---|---|
| Additional Information: | The Economic and Social Research Council (ESRC) provided financial support (PTA-030-2004-00560). |
| Status: | Published |
| Refereed: | Yes |
| Glasgow Author(s) Enlighten ID: | Hanley, Professor Nicholas |
| Authors: | Mackenzie, I. A., Hanley, N., and Kornienko, T. |
| College/School: | College of Medical Veterinary and Life Sciences > School of Biodiversity, One Health & Veterinary Medicine |
| Journal Name: | Environmental and Resource Economics |
| Publisher: | Springer |
| ISSN: | 0924-6460 |
| ISSN (Online): | 1573-1502 |
| Published Online: | 03 May 2007 |
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