Environmental and Resource Economics

, Volume 39, Issue 3, pp 265–282 | Cite as

The optimal initial allocation of pollution permits: a relative performance approach

  • Ian A. MackenzieEmail author
  • Nick Hanley
  • Tatiana Kornienko
Original Paper


The initial allocation of pollution permits is an important aspect of emissions trading schemes. We generalize the analysis of Böhringer and Lange (2005, Eur Econ Rev 49(8): 2041–2055) to initial allocation mechanisms that are based on inter-firm relative performance comparisons (including grandfathering and auctions, as well as novel mechanisms). We show that using firms’ historical output for allocating permits is never optimal in a dynamic permit market setting, while using firms’ historical emissions is optimal only in closed trading systems and only for a narrow class of allocation mechanisms. Instead, it is possible to achieve social optimality by allocating permits based only on an external factor, which is independent of output and emissions. We then outline sufficient conditions for a socially optimal relative performance mechanism.


Relative performance Initial allocation Pollution permits Auctions Rank-order contests 

JEL Classification

Q53 Q58 C72 


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Copyright information

© Springer Science+Business Media B.V. 2007

Authors and Affiliations

  • Ian A. Mackenzie
    • 1
    Email author
  • Nick Hanley
    • 1
  • Tatiana Kornienko
    • 1
  1. 1.Department of EconomicsUniversity of StirlingStirlingUK

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