Journal
JOURNAL OF PUBLIC ECONOMICS
Volume 75, Issue 2, Pages 273-291Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/S0047-2727(99)00050-X
Keywords
emissions trading; voluntary opt-in; adverse selection
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This paper studies a phase-in emissions trading program with voluntary opt-in possibilities for non-affected firms and derives optimal permits allocations to affected and opt-in firms when the environmental regulator has incomplete information on individual unrestricted emissions and control costs. The regulator faces a trade-off between production efficiency (minimization of control costs) and information rent extraction (reduction of excess permits allocated to opt-in firms). The first-best equilibrium can be attained if the regulator can freely allocate permits to affected and opt-in firms; otherwise a second-best equilibrium is implemented. The latter is sensitive to uncertainty in control costs and benefits. (C) 2000 Elsevier Science S.A. All rights reserved.
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