Strategic Behavior, Private Information, and Decentralization in the European Union Emissions Trading Scheme

Abstract

In the European Union Emissions Trading Scheme, the supply of carbon permits is determined in a decentralized manner by the Member States. Alternatively, the supply could be determined by the EU central authority. We analyze whether decentralization leads to lower total abatement costs under various assumptions about the behavior of the Member States and the privacy of information about their abatement costs. If the Member States do not behave strategically, then decentralization is preferred, regardless of whether abatement costs are private information. If the Member States behave strategically, then decentralization may or may not be preferred, depending on the values of four important parameters.

Keywords: Decentralization, Pollution Permits, European Union

JEL Classification: D43, Q28