Optimal Design of a Phase-in Emissions Trading Program

Juan-Pablo Montero

Journal of Public Economics, Vol. 75, No. 2, pp. 273-91 (February 2000)

Juan-Pablo Montero, Journal of Public Economics, Vol. 75, No. 2, pp. 273-91 (February 2000)

This paper studies a phase-in emissions trading program with voluntary opt-in possibilities for non-affected firms and derives optimal permits allocations to affected and opt-in firms when the environmental regulator has incomplete information on individual unrestricted emissions and control costs. The regulator faces a tradeoff between production efficiency (minimization of control costs) and information rent extraction (reduction of excess permits allocated to opt-in firms). The first-best equilibrium can be attained if the regulator can freely allocate permits to affected and opt-in firms; otherwise a second-best equilibrium is implemented. The latter is sensitive to uncertainty in control costs and benefits. Copyright 2000 Elsevier Science S.A. All rights reserved. Reprinted with permission from Elsevier Science.

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