Environmental and Resource Economics

, Volume 69, Issue 4, pp 661–691 | Cite as

Windfall Profits Under Pollution Permits and Output-Based Allocation

  • Jean-Philippe Nicolaï
  • Jorge Zamorano


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.


Tradable permits Oligopoly markets Output-based allocation European Union Emission Trading Scheme (EU ETS) 

JEL Classification

F18 H2 Q5 


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Copyright information

© Springer Science+Business Media Dordrecht 2016

Authors and Affiliations

  1. 1.Chair of Integrative Risk Management and EconomicsETH ZurichZurichSwitzerland
  2. 2.Centre d’Economie de la SorbonneUniversité Paris I Panthéon SorbonneParis Cedex 13France
  3. 3.Departamento de Ingeniería IndustrialUniversidad de Santiago de ChileSantiagoChile

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