Emissions Trading with Profit-Neutral Permit Allocations
نویسندگان
چکیده
This paper examines the impact of an emissions trading scheme (ETS) on industry output, price, costs, emissions, market shares, and pro ts. We develop formulae for the number of emissions permits that have to be freely allocated to rms in order to neutralize any adverse impact the ETS may have on pro ts. Under quite general conditions, industry pro ts are preserved so long as rms are freely allocated a fraction of their total demand for permits, with this fraction lower than the industrys Her ndahl index. Our results have important implications for ETS design, especially for its ability to raise government revenue. Keywords: Cap-and-trade, permit allocation, pro t-neutrality, cost pass-through, abatement, grandfathering. JEL classi cations: D43, H23, Q58.
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