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Windfall Profits Under Pollution Permits and Output-Based Allocation

Jean-Philippe Nicolaï () and Jorge Zamorano ()
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Jean-Philippe Nicolaï: ETH Zurich
Jorge Zamorano: Université Paris I Panthéon Sorbonne

Environmental & Resource Economics, 2018, vol. 69, issue 4, 661-691

Abstract: Abstract 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.

Keywords: Tradable permits; Oligopoly markets; Output-based allocation; European Union Emission Trading Scheme (EU ETS) (search for similar items in EconPapers)
JEL-codes: F18 H2 Q5 (search for similar items in EconPapers)
Date: 2018
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