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Publicado en: Documento de trabajo

Output-based allocations in pollution markets with uncertainty and self-selection

Guy Meunier; Juan-Pablo Montero and Jean-Pierre Ponssard

Documento de Trabajo IE-PUC, N° 490, 2017

We study pollution permit markets in which a fraction of permits are allocated to fi rms based on their output. Output-based allocations, which are receiving increasing attention in the design of carbon markets around the world (e.g., Europe, California, New Zealand), are shown to be optimal under demand and supply volatility despite the output distortions they may create. In a market that covers multiple sectors, the optimal design combines auctioned permits with output-based allocations that are speci fic to each sector and increasing in its volatility. When fi rms are better informed about the latter or must self select, the regulator resorts to some free (i.e., lump-sum) allocations to sort firms out.

JEL Classi cation: D24, L13, H23, L74
Keywords: pollution markets, output-based allocations, market volatility, rent-seeking, self-selection, climate policy


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