Optimal Design of a Phase-in Emissions Trading Program with Voluntary Compliance Options

Juan-Pablo Montero


In this paper we explore the welfare implications of voluntary compliance within an emissions trading program and derive optimal permits allocations to affected and opt-in sources when the environmental regulator has incomplete information on individual unrestricted emissions and control costs. The regulator faces a trade-off between production efficiency (minimization of control costs) and information rent extraction (reduction of excess permits allocated to opt-in sources). The first-best equilibrium can be attained if the regulator can freely allocate permits to affected and opt-in sources