Allocation of tradable emission permits in a global economy

Abstract

This paper discusses the question of how a national government should design a system of tradable emission permits when goods or production factors are internationally mobile. Emphasis is on the principles for the allocation of emission permits to firms, and in particular on the role of free emission permits in the design of environmental policies. It is shown that to allocate emission permits free of charge to certain firms may play a potentially important role in the design of environmental policies. When the allocation criteria are carefully chosen, the use of free emission permits might ensure both higher national welfare and a better environment.