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Output and abatement effects of allocation readjustment in permit trade

Sterner, Thomas ; Muller, Adrian

In: Climatic Change, 2008, vol. 86, no. 1-2, p. 33-49

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    Title
    • Output and abatement effects of allocation readjustment in permit trade
    Author
    • Sterner, Thomas. Environmental Economics Unit (EEU), Department of Economics, Göteborg University, PO Box 640, 40530, Göteborg, Sweden
    • Muller, Adrian. Environmental Economics Unit (EEU), Department of Economics, Göteborg University, PO Box 640, 40530, Göteborg, Sweden
    Document Type
    • Postprint
    Classification
    • Earth sciences
    OAI-PMH Identifier
    • oai:doc.rero.ch:317495
    Summary
    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