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Competitive Markets for Pollution Permits: Impact on Factor Income and International Equilibrium

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Abstract

We are interested in the impact of pollution permits on wages and profits. We analyze important consequences of introducing a market of pollution permits. A fundamental issue concerns the initial allocation of such permits: should they be allocated freely by grandfathering or be auctioned. The international symmetric case allows us to capture the essence of the problem on income factor. We show that allocating permits to factors in proportion of their contribution to production leads to an efficient (neoclassical) distribution. Considering the international asymmetric case, we show that a permit market does not modify the competitive world equilibrium without permits when the total allocation is large enough. When it is not, if allocation of permits is not proportional to the emissions in the world without permits, there is a reduction factor of emissions that results from the equilibrium allocation of capital.

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Notes

  1. The Canadian Non-paper is a proposal by Canada joined by seven other Annex I members and tabled in Bonn, 3 June 1998.

  2. We use “auctioned” just to mean “charged,” while “grandfathering” means “free of charge.”

  3. This net revenue is similar to the gross operating surplus defined by Hahn and Solow [19], p 71.

  4. This function first increases, reaches a maximum equal to 1 in the proportional case (e  ∗  = μ) and then decreases.

  5. Jouvet et al. [21] obtain a similar result considering an optimal growth framework.

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Authors and Affiliations

  1. EconomiX, University of Paris Ouest Nanterre La Défense, 200 avenue de la République, 92000, Nanterre, France

    Pierre-André Jouvet, Philippe Michel & Gilles Rotillon

  2. CORE, Louvain-La-Neuve, Belgium

    Pierre-André Jouvet

Authors
  1. Pierre-André Jouvet
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  2. Philippe Michel
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  3. Gilles Rotillon
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Correspondence to Pierre-André Jouvet.

Additional information

Concordant comments and suggestions made by two anonymous referees have been extremely helpful to prepare this version of the paper. The full details of proofs are available on request from the authors.

Philippe Michel passed away on July 22, 2004.

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Jouvet, PA., Michel, P. & Rotillon, G. Competitive Markets for Pollution Permits: Impact on Factor Income and International Equilibrium. Environ Model Assess 15, 1–11 (2010). https://doi.org/10.1007/s10666-009-9195-5

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