Rent Seeking over Tradable Emission Permits

Ashwin Rode ()
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Ashwin Rode: University of Chicago

Environmental & Resource Economics, 2021, vol. 78, issue 2, No 3, 257-285

Abstract: Abstract The allocation of emission permits at no cost during the establishment of a cap-and-trade program creates opportunities for rent-seeking. I examine the consequences of such rent-seeking by exploiting an unusual feature of the UK’s permit allocation procedure in Phase 1 of the EU’s CO $$_{2}$$ 2 Emissions Trading Scheme, whereby it is possible to observe both a firm’s actual permit allocation as well as an earlier, technocratically-based provisional allocation that was never implemented. Firms had the opportunity to appeal their provisional allocation. I find that a firm’s financial connections to members of the House of Commons strongly predict its post-appeal allocation. Even after controlling for the provisional allocation, along with industry and financial characteristics, a connection to an additional member is associated with a significant increase in a firm’s actual permit allocation. Using results from a contest-theoretic framework, I estimate the welfare loss from rent-seeking to be over 100 million euros—a significant amount relative to the abatement costs firms incurred to reduce emissions.

Keywords: Rent seeking; Environmental economics; Tradable permits; Political connections (search for similar items in EconPapers)
JEL-codes: D72 H23 Q58 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10640-020-00531-z

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