My Econ211 students are currently writing an essay on the European emissions trading scheme.
The allocation of pollution rights is controversial. This paper by Nick Hanley and others makes suggests an interesting new mechanism.
Using contests to allocate pollution rights
Using contests to allocate pollution rights
Author(s):
MacKenzie, Ian A
Hanley, Nick
Kornienko, Tatiana
Contact Email: imackenzie@ethz.ch
Citation: Stirling Economics Discussion Paper 2008-21
Keywords: Rank-order contests, pollution permits, initial allocation
JEL Code(s): D44 Q25
Issue Date: Oct-2008
Series/Report no.: Stirling Economics Discussion Paper 2008-21
Abstract: In this paper we advocate a new initial allocation mechanism for a tradable pollution permit market. We outline a Permit Allocation Contest (PAC) that distributes permits to firms based on their rank relative to other firms. This ranking is achieved by ordering firms based on an observable 'external action' where the external action is an activity or characteristic of the firm that is independent of their choice of emissions in the tradeable permit market. We argue that this mechanism has a number of benefits over auctioning and grandfathering. Using this mechanism efficiently distributes permits, allows for the attainment of a sec- ondary policy objective and has the potential to be more politically appealing than existing alternatives.
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