- Under free allocation, most permits remain with the high emitters who received them for free, apparently because the high emitters are able to use their market power to keep the permit price high and reduce trade.
- Firms pass the cost of permits through to their customers under both treatments (even if they got them for free). Surprisingly, product prices are even higher under free allocation (not sure why this is the case).
- With free allocation of permits, the high emitters walk away with large windfall profits. These disappear with auctioning, with the surplus instead going to the government as auction revenue and to consumers in the form of lower product prices.
This study adds further support to the idea that permits should be overwhelmingly auctioned, not given away. Permit giveaways benefit no-one other than the companies who get the free permits, at the expense of their competitors, consumers and taxpayers.
Goeree, J., C. Holt, K.L. Palmer, W. Shobe and D. Burtraw (2009). "An Experimental Study of Auctions versus Grandfathering to Assign Pollution Permits." RFF Discussion Paper 09-39, Sept 2009.
(HT: Climate Changes)