. Permits: Implementation Issues
Initial allocation of permits
To begin a permit trading system, firms need to have permits to trade. The initial
distribution can be done in several ways.
The government can auction permits to highest bidder.
At least initially, additional trading shouldn’t be needed, as permits
go to firms willing to pay the most.
Raises revenue for the government.
Equal distribution among firms.
May seem fairer, but what if firms are of different sizes.
Historical emissions rates (more permits to bigger polluters).
For example, if want to reduce pollution by 10%, give each firm
permits equal to 90% of their current emissions.
However, this penalizes early actors. Should firms that have
already reduced get fewer permits?
Also, combined systems are possible (e.g. hold back some permits for
Note that firms will prefer getting the permits for free, as it gives them an
additional asset. Auctioning permits makes the plan more like a tax. Thus, free
distribution is more politically palatable.
Also, note that if the market is competitive, the market should yield an efficient
solution no matter what the initial allocation. However, the effects on individual
firms (e.g. who benefits by selling permits, versus needing to buy them), will be
Establishing trading rules
For a market to work, transactions costs must be low.
However, at the same time, monitoring and enforcement will be necessary.
Need to track both emissions and the number of permits each firm has.
Who should be able to participate?
Should environmental groups or private individuals be able to buy permits
and then not use them?
The EU Emissions Trading Scheme (EU-ETS) is a good example of this.
The EU faces an overall cap on carbon emissions from Kyoto.
From this, the EU has specified the industries that will participate
in trading (electric utilities, oil refineries, coke ovens, iron & steel,
cement kilns, glass manufacturing, ceramics manufacturing, and
the pulp and paper industry)
Each country gets allowances based on its national cap in Kyoto.
It faces two allocation decisions:
Total allowances are spread between the trading & non-
Permits in the trading sector must be allocated among