Seminarios

We quantify the long-run effects on output, aggregate TFP and welfare of alternative permit allocation schemes of a cap-and-trade program. We use a firm dynamics model with heterogeneous firms and add an emission market with a cap-and-trade regulation. We calibrate the model with establishment and emission data in the US and study three permit allocation methods: auctions, output-based-allocation and grandfathering. A 30% reduction in emissions is associated with a welfare cost that is highest for auctioning (3.3%), followed by grandfathering ($.9%) and, finally, output-based allocation (1.8%). When we introduce an abatement technology, the cost is smaller for all three alternatives, but, unlike the previous case, grandfathering gives the lowest welfare cost.