Optimal design of a phase-in emissions trading program with voluntary compliance options

Abstract

In this paper we explore the welfare implications of voluntary compliance within an emissions trading program and derive optimal permits allocations to affected and opti-in sources when the environmental regulator has incomplete information on individual unrestricted emissions and control costs. The regulator faces a trade-off between production efficiency (minimization of control costs) and information rent extraction (reduction of excess permits allocated to opt-in sources). The first-best equilibrium can be attained if the regulator can freely allocate permits to affected and opt-in sources; otherwise a second-best equilibrium is implemented. The latter is sensitive to uncertainty in control costs and benefits