Abstract
Since the Kyoto Agreement, the idea of setting up pollution rights as an instrument of environmental policy for the reduction of greenhouse gases has progressed significantly. But the crucial problem of allocating these permits in a manner acceptable to all countries is still unsolved. There is a general consensus that this should be done according to some proportional allocation rule, but opinions vary greatly about what would be the appropriate proportionality parameter. In this paper, we analyze the economic consequences of different allocation rules in a general equilibrium framework. We first show the existence and unicity of an international equilibrium under the assumption of perfect mobility of capital and we characterize this equilibrium according to the dotations of permits. Then, we compare the economic consequences of three types of allocation rules when the permit market is designed to reduce total pollution. We show that a rule which applies some form of grandfathering simply reduces production and emissions proportionally and efficiently. In contrast, an allocation rule proportional to population is beneficial for developing countries. Finally per capita allocation rules induce size effect and can reverse these results.
Highlights
One of the most interesting developments in environmental policy in recent years has been the emergence of global environment as a North-South issue
We analyze the economic consequences of different allocation rules in a general equilibrium framework
In this paper we study an international equilibrium in a two-country model with capital and permit market
Summary
One of the most interesting developments in environmental policy in recent years has been the emergence of global environment as a North-South issue. To be sure that the full impact of environmental policies can be analyzed through to its ultimate effects on factor markets, income and pollution, a general equilibrium approach is needed This is the way pioneered by Copeland and Taylor [1,2] and Chichinilsky [3] who study the links between trade and environment in a North-South context. A level allocation rule (proportional to outputs, emissions or physical capital) reduces production and emissions in both countries proportionally with a change in the technology used In this case, each country uses exactly its dotation of permits and the equilibrium allocation of capital is the same as in the economy without permits.
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