Windfall Profits Under Pollution Permits and Output-Based Allocation

This paper analyzes the implementation of pollution permits. It focuses on the distributional impacts linked with the stringency of output-based allocation when two sectors are covered by the market for permits and the total cap is held constant. A new type of profit increase in sectors that are not...

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Bibliographic Details
Published in:Environmental & resource economics 2018-04, Vol.69 (4), p.661-691
Main Authors: Nicolaï, Jean-Philippe, Zamorano, Jorge
Format: Article
Language:English
Subjects:
Allocations
Economic Policy
Economics
Economics and Finance
Electric industries
Electricity
Emissions
Emissions trading
Environmental Economics
Environmental Law/Policy/Ecojustice
Environmental Management
Humanities and Social Sciences
Pollution
Profits
Windfall profits
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Summary:This paper analyzes the implementation of pollution permits. It focuses on the distributional impacts linked with the stringency of output-based allocation when two sectors are covered by the market for permits and the total cap is held constant. A new type of profit increase in sectors that are not exposed to international competition, when energy-intensive trade-exposed (EITE) sectors are granted output-based allocations, is demonstrated theoretically. The paper also illustrates a profit increase in the electricity sector in a possible fourth phase of the European Union Emission Trading Scheme, in which output-based allocation will be granted to EITE sectors, compared with the case in which all permits are auctioned.
ISSN:0924-6460
1573-1502
DOI:10.1007/s10640-016-0096-1