The Allocation of Tradeable Emission Permits within Federal Systems (or Economic Unions) (original) (raw)

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 amoun...