Tradable Carbon Permit Auctions: How and Why to Auction Not Grandfather

An auction of carbon permits is the best way to achieve carbon caps set by international negotiation to limit global climate change. To minimize administrative costs, permits would be required at the level of oil refineries, natural gas pipe lines, liquid sellers, and coal processing plants. To maximize liquidity in secondary markets, permits would be fully tradable and bankable. The government would conduct quarterly auctions. A standard ascending-clock auction in which price is gradually raised until there is no excess demand would provide reliable price discovery. An auction is preferred to grandfathering (giving polluters permits in proportion to past pollution), because it allows reduced tax distortions, provides more flexibility in distribution of costs, provides greater incentives for innovation, and reduces the need for politically contentious arguments over the allocation of rents.


Issue Date:
1998
Publication Type:
Working or Discussion Paper
Record Identifier:
http://ageconsearch.umn.edu/record/10668
PURL Identifier:
http://purl.umn.edu/10668
Total Pages:
24
JEL Codes:
Q3; D4
Series Statement:
Discussion Paper 98-34




 Record created 2017-04-01, last modified 2018-01-22

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