Designing Organizations for Trading Pollution Rights

Regulators and academicians have recently become interested in using a marketable permits program as a new way to control aggregate pollution emissions. Our research focuses on choosing a permit trading mechanism that is both economically efficient and politically viable. We consider an organized trading process and a revenue neutral auction, both of which involve an initial allocation of permits based on past history. Each is tested in a competitive and in a non-competitive environment to determine which mechanism performs best. The results of our research suggest that, overall, the organized trading process outperforms the revenue neutral auction.