The Effects of Rent Seeking Over Tradable Pollution Permits

CER-ETH - Center of Economic Research at ETH Zurich, Working Paper No. 09/112

36 Pages Posted: 18 Jul 2009

See all articles by Nick Hanley

Nick Hanley

University of Glasgow - Department of Economics

Ian A. MacKenzie

University of Queensland - School of Economics

Date Written: July 2009

Abstract

The establishment of a tradable permit market requires the regulator to select a level of aggregate emissions and then distribute the associated permits (rent) to specific groups. In most circumstances, these decisions are often politically contentious and frequently influenced by rent seeking behaviour. In this paper, we use a contest model to analyse the effects of rent seeking effort when permits are freely distributed (grandfathered). Rent seeking behaviour can influence both the share of permits which an individual firm receives and also the total supply of permits. This latter impact depends on the responsiveness of the regulator to aggregate rent seeking effort. Using a three-stage game, we show that rent seeking can influence both the distribution of rents and the ex post value of these rents, whilst welfare usually decreases in the responsiveness of the regulator.

Keywords: tradable permit market, rent seeking, initial allocation

JEL Classification: D72, D78, Q53

Suggested Citation

Hanley, Nick and MacKenzie, Ian A., The Effects of Rent Seeking Over Tradable Pollution Permits (July 2009). CER-ETH - Center of Economic Research at ETH Zurich, Working Paper No. 09/112, Available at SSRN: https://ssrn.com/abstract=1434371 or http://dx.doi.org/10.2139/ssrn.1434371

Nick Hanley (Contact Author)

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom
0141 330 4618 (Phone)
0141 330 4940 (Fax)

Ian A. MacKenzie

University of Queensland - School of Economics ( email )

Brisbane, QLD 4072
Australia

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