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Emission Reduction and Profit-Neutral Permit Allocations

Author

Listed:
  • Jean-Philippe Nicolaï

    (ETH Zurich, Switzerland)

Abstract

The present paper addresses two policy objectives that the environmental regulator aims to accomplish: to implement a market for permits and 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 profits after regulation (i.e. profits that the firm realizes in the market for products plus the value of the allowances granted for free) are equal to profits before regulation. The paper demonstrates that a low number of free allowances is sufficient to meet these two goals. Moreover, even when the reduction is high, the regulator can fully offset losses if the concerned sectors are not in a monopoly context. The suggested model is developed by assuming that firms compete "à la Cournot", use polluting technologies and the demand function is iso-elastic. It is then illustrated by the first two phases of the EU Emissions Trading System.

Suggested Citation

  • Jean-Philippe Nicolaï, 2015. "Emission Reduction and Profit-Neutral Permit Allocations," CER-ETH Economics working paper series 15/224, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    • Handle: RePEc:eth:wpswif:15-224
    as

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    File URL: http://www.cer.ethz.ch/content/dam/ethz/special-interest/mtec/cer-eth/cer-eth-dam/documents/working-papers/WP-15-224.pdf
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    References listed on IDEAS

    as
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    4. Hepburn, Cameron J. & Quah, John K.-H. & Ritz, Robert A., 2013. "Emissions trading with profit-neutral permit allocations," Journal of Public Economics, Elsevier, vol. 98(C), pages 85-99.
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    More about this item

    Keywords

    Pollution permits; Cournot oligopoly; EU-ETS;
    All these keywords.

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

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