The Allocation of Tradeable Emission Permits within Federal Systems (or Economic Unions) (original) (raw)
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This paper deals with the issue of whether the power of allocating tradeable emission permits within a federal system (or an economic union) should be centralized or delegated to the single states/nations. To this end, we develop a simple two stage game played by two governments and their respective industries producing a homogeneous output that is sold in a third country. We show that when emission permits are traded competitively at a federal (or economic union) level, a decentralized emission trading system (DETS) would result in a lower than optimal price of permits, as well as in an aggregate emission target which is larger than the socially optimal target that would arise under a centralized system (CETS). This result partly hinges on standard international externality considerations; on the other hand, we find a new "channel" through which decentralized permits distribution could lead to distortions: under a DETS, national governments play a Cournot game, and choose the amount of allowances to be distributed to domestic firms without accounting for the spillover such distribution generates on the other country via the price of allowances.
Unilateral regulation of bilateral trade in greenhouse gas emission permits
Ecological Economics, 2005
This paper considers the coordination of domestic markets for tradable emission permits where countries determine their own emission reduction targets, using a two-country model. Linking such schemes is beneficial to both countries but may cause the exporting country to decrease its emission reduction target and export more permits. This in turn would not only reduce the costs for both countries as less emissions have to be reduced, but it also lowers the environmental benefits of the importing country.
Enforcement and environmental quality in a decentralized emission trading system
Journal of Regulatory Economics, 2011
This paper addresses the issue of whether the powers of monitoring compliance and allocating tradeable emissions allowances within a federation of countries should be appointed to a unique federal regulator or decentralized to several local regulators. To this end, we develop a two stage game played by environmental regulator(s) and the polluting industries of two countries. Regulator(s) choose the amount of emission allowances to be issued and set the level of monitoring effort to achieve full compliance, while regulated firms choose actual emissions and the number of permits to be held. We identify various, possibly conflicting, spillovers among states in a decentralized setting. We show that cost advantage in favor of local regulators is not sufficient to justify decentralization. Nevertheless, cost differential in monitoring violations can imply lower emissions and greater welfare under a decentralized institutional setting than under a centralized one. However, while a better environmental quality under decentralization is a sufficient condition for higher welfare under the same regime, it is not also a necessary condition.
A Note on International Emissions Trading with Endogenous Allowance Choices
Economics Bulletin
In this note we extend the analysis developed by Helm (2003) and consider an international emissions trading system (ETS) where the initial allocation of tradeable permits may be chosen non cooperatively, as in Helm, or cooperatively. We first derive conditions guaranteeing that polluting firms located in a given country benefit from an increase in the received amount of emission permits; then, we compare the countries' allocation choices under both a non-cooperative (decentralized) and a cooperative (centralized) regime, showing that, both in each country and on aggregate decentralization leads to a lower environmental quality than the "first best" that would arise under a centralized ETS. As a result, the equilibrium permits price in the latter case is higher than under decentralization. We show that this conclusions do not depend only on the presence of transboundary pollution, but also on the international dimension of emissions trading. Finally, although centraliz...
Why so many Tradeable Emission Permits within the European Union?
This paper suggests a possible theoretical rationale for some pieces of evidence referred to the EU emissions trading system. To this end, we develop a three stage game played by two governments, their respective polluting industries and the environmental authorities taking part to an economic union.
Global trading of carbon dioxide permits with noncompliant polluters
International Tax and Public Finance, 2008
We study the optimal assignment of policy instruments at regional and interregional levels, for international carbon emissions trading with noncompliant polluters. We demonstrate that decentralization of regional emission quotas is socially optimal, when fines and interregional income transfers are implemented by intergovernmental authorities after regional policy making, because regional regulators fully acknowledge the externalities of their choices on global income and on all the non-bankruptcy constraints on fines. Regional and interregional inspections have the same welfare impacts when the income redistribution policy is feasible; otherwise they lead to different global emission levels with complete decentralization of regional policy instruments.
Tradable emission permits in a federal system
2004
A system of tradable permits in the standard setting is effective in attaining the policy objective with regard to pollution reduction at the least cost. This outcome is challenged in case of a tradable permit system in a federal state with individual states having discretionary power regarding environmental policy and where pollution is transboundary across states. This paper explores the opportunities of the central authority to influence the effectiveness of the system, under different institutional arrangements, through the initial allocation of permits.
Environmental & Resource Economics, 1997
In the present paper, we analyse the interaction of a competitive market for emission permits with an oligopolistic product market. It is well known that a competitive permits market achieves the cost minimizing distribution of abatement effort among the polluting firms for a given reduction in emissions. However, when the product market is oligopolistic, it may redistribute production inefficiently among firms. It has been suggested that this inefficiency can outweigh the gains obtained from using emission permits instead of command and control. Although this argument is clearly correct under full information, it is shown in the present paper that it reverses under incomplete information. In particular, it is shown that when tradeable emission permits are specified according to the standard textbook example, they yield higher social welfare than the command and control regulation.
Welfare Reducing Emission Permit Trade
2002
In this paper we analyse the problem why in many simulations of the impacts of the Kyoto agreement Russia (or Former Soviet Union) appears to loose if the agreement is implemented via international emission permit markets even though with national implementation it cannot use its emission quota fully. We focus on the role of general equilibrium changes in world market prices as an explanation and show that it can, indeed, explain much of the welfare deterioration at least for Russia (Former Soviet Union). We base our quantitative analysis on the GTAP-E-model.