CROSS-INDUSTRY EMISSION PERMITS TRADING

The present paper examines the effectiveness of emission permits tradi ng across industries. We find that, while permits trading in a competi tive environment minimizes costs of compliance, it also enhances produ ct market imperfections. We also find that a standard-setting regulati on yields superior welfare results if policy makers have able informat ion. Standard setting allows policy makers the flexibility of taking i nto account the existing imperfections in each industry. Although not surprising, this result has important policy implications in situation s in which policy makers consider establishing permits trading between publicly owned dominant polluters and other industrial polluters. Sin ce policy makers have able information on publicly-owned firms, it mig ht be welfare improving to directly control emissions of the dominant publicly-owned polluters. Given that many of the major polluters in th e real world are large firms in heavily concentrated industries many o f which are also regulated, our result warrants policy makers' attenti on.