Back

Output-based Allocations in Pollution Markets With Uncertainty and Self-Selection

Guy Meunier, Juan-Pablo Montero and Jean-Pierre Ponssard

September 2017

We study pollution permit markets in which a fraction of permits are allocated to firms based on their output. Output-based allocations, which are receiving increasing attention in the design of carbon markets around the world (e.g., Europe, California, New Zealand), are shown to be optimal under demand and supply volatility despite the output distortions they may create. In a market that covers multiple sectors, the optimal design combines auctioned permits with output-based allocations that are specific to each sector and increasing in its volatility. When firms are better informed about the latter or must self select, the regulator resorts to some free (i.e., lump-sum) allocations to sort firms out.

JEL Classi cation: D24, L13, H23, L74
Keywords: pollution markets, output-based allocations, market volatility, rent-
seeking, self-selection, climate policy

For Sponsors Only

As a benefit to our Associates, the latest Working Papers are embargoed for a period of up to six months before becoming accessible to the public. If you are interested in becoming an Associate or learning more about the benefits of sponsorship, please click here.