Using contests to allocate pollution rights

Citation

Mackenzie IA, Hanley N & Kornienko T (2008) Using contests to allocate pollution rights. Stirling Economics Discussion Paper, 2008-21.

Abstract
In this paper we advocate a new initial allocation mechanism for a tradable pollution permit market. We outline a Permit Allocation Contest (PAC) that distributes permits to firms based on their rank relative to other firms. This ranking is achieved by ordering firms based on an observable 'external action' where the external action is an activity or characteristic of the firm that is independent of their choice of emissions in the tradeable permit market. We argue that this mechanism has a number of benefits over auctioning and grandfathering. Using this mechanism efficiently distributes permits, allows for the attainment of a sec- ondary policy objective and has the potential to be more politically appealing than existing alternatives.

Keywords
Rank-order contests; pollution permits; initial allocation

JEL codes

• D44: Auctions
• Q25: Renewable Resources and Conservation: Water