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The Optimal Distribution of Pollution Rights in the Presence of Political Distortions

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  • Yu-Bong Lai

Abstract

A critical issue in designing a system of tradable emission permits concerns the distribution of the initial pollution rights. The purpose of this paper is to investigate how the initial rights should be optimally set, when the determination of the number of tradable permits is subject to the influence of interest groups. According to the Coase theorem, in the case where there are low transaction costs, the assignment of the initial rights does not affect the efficiency of the final resource allocation. In the presence of political pressure, we show that the distribution of the initial rights has a significant effect on social welfare. In contrast to the conventional results, we find that grandfathered permits may be more efficient than auctioned permits, even after taking into consideration the revenue-recycling effect. Copyright Springer Science+Business Media, Inc. 2007

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  • Yu-Bong Lai, 2007. "The Optimal Distribution of Pollution Rights in the Presence of Political Distortions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 36(3), pages 367-388, March.
    • Handle: RePEc:kap:enreec:v:36:y:2007:i:3:p:367-388
    DOI: 10.1007/s10640-006-9020-4
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    Cited by:

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    2. Park, Ji-Won & Kim, Chae Un & Isard, Walter, 2012. "Permit allocation in emissions trading using the Boltzmann distribution," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(20), pages 4883-4890.
    3. Li, He & Lu, Juan, 2021. "Can stable environmental protection officials’ tenure reduce illegal emissions?," Socio-Economic Planning Sciences, Elsevier, vol. 78(C).
    4. Alessandro Tavoni & Ralph Winkler, 2021. "Domestic Pressure and International Climate Cooperation," Annual Review of Resource Economics, Annual Reviews, vol. 13(1), pages 225-243, October.
    5. Habla, Wolfgang & Winkler, Ralph, 2013. "Political influence on non-cooperative international climate policy," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 219-234.
    6. Alex Dickson & Ian A. MacKenzie, 2022. "Permit Markets with Political and Market Distortions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(1), pages 227-255, May.
    7. Sonia Schwartz, 2009. "Comment distribuer les quotas de pollution ?. Une revue de la littérature," Revue d'économie politique, Dalloz, vol. 119(4), pages 535-568.
    8. Hanley Nick & MacKenzie Ian A, 2010. "The Effects of Rent Seeking over Tradable Pollution Permits," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-26, July.
    9. Pauli Lappi, 2021. "Lobbying for size and slice of the quota," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1143-1162, October.
    10. Chu‐chuan Cheng & Hsun Chu, 2020. "International emissions trading in a political economy," Review of International Economics, Wiley Blackwell, vol. 28(2), pages 429-446, May.
    11. Yu-Bong Lai, 2009. "Is a Double Dividend Better than a Single Dividend?," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 165(2), pages 342-363, June.
    12. Minoru Nakada, 2020. "The impact of environmental tax revenue allocation on the consequence of lobbying activities," Economics of Governance, Springer, vol. 21(4), pages 335-349, December.
    13. Guo, Ji & Zhao, Mengke & Wu, Xianhua & Shi, Beibei & Santibanez Gonzalez, Ernesto D.R., 2021. "Study on the distribution of PM emission rights in various provinces of China based on a new efficiency and equity two-objective DEA model," Ecological Economics, Elsevier, vol. 183(C).
    14. Ian A. MacKenzie, 2017. "Rent creation and rent seeking in environmental policy," Public Choice, Springer, vol. 171(1), pages 145-166, April.

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    More about this item

    Keywords

    auction; grandfathering; interest groups; revenue-recycling effect; tradable emission permits; D72; Q38; H77;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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