ON MULTI-PERIOD ALLOCATION OF TRADABLE EMISSION PERMITS

Katrin Rehdanz and Richard Tol

No FNU-43, Working Papers from Research unit Sustainability and Global Change, Hamburg University

Abstract: TEconomic analysis of emission permit markets, and particularly of the initial permit allocation, have concentrated largely on static approaches. This is somewhat unsatisfactory as the allocation method in subsequent commitment periods may influence the behaviour of the market participants in the current period. For instance, some advocate a system of “rolling grandfathering”, in which later period allocations would be based on the actual (rather than allotted) emissions in earlier periods. Alternatively, emission permits can be allocated on the basis of the distance between actual and desired emission intensities in previous periods. This paper analyses the dynamic aspects of allocating greenhouse gas emission rights for different approaches using multi-player/two-period models. We show that different future allocation approaches create different strategic incentives at present, and that the permit market may partially or completely offset these incentives. We also demonstrate under what circumstances dynamic allocation rules create incentives to (lobby for) accelerating or decelerating emission reduction paths. Allowing for intertemporal transfer of abatement activities (banking and borrowing), the net present costs can be reduced. However, whether banking or borrowing is beneficial for a company depends not only on their own abatement costs and that of other companies trading permits on the market, but also on the allocation mechanism implemented.

Keywords: banking and borrowing; emission permits; permit allocation; dynamic approach (search for similar items in EconPapers)
JEL-codes: Q54 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2004-04, Revised 2004-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Forthcoming, Tulkens (ed.)

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