The effects of rent seeking over tradable pollution permits

Citation

Hanley N & Mackenzie IA (2010) The effects of rent seeking over tradable pollution permits. Stirling Economics Discussion Paper, 2010-02.

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; Environmental management; Environmental permits; Environmental impact charges; Atmospheric carbon dioxide Prevention Costs

JEL codes

• D72: Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
• D78: Positive Analysis of Policy Formulation and Implementation
• Q53: Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling