Strategic Behavior and the Environment > Vol 6 > Issue 3

Spreading the Green Around the World — How the Permit Allocation Affects Technology Diffusion and Welfare

Alfred Endres, University of Hagen and University of Witten/Herdecke, Germany, Bianca Rundshagen, University of Hagen, Germany,
Suggested Citation
Alfred Endres and Bianca Rundshagen (2017), "Spreading the Green Around the World — How the Permit Allocation Affects Technology Diffusion and Welfare", Strategic Behavior and the Environment: Vol. 6: No. 3, pp 249-287.

Published: 30 Mar 2017
© 2017 A. Endres and B. Rundshagen
Environmental Economics,  Environmental Economics: Climate Change,  Environmental Economics: Market-based Policy Instruments,  Law and Economics,  Public Economics: Public Goods,  Economic Theory: Game Theory,  Climate Change, Strategic Behavior and the Environment
JEL Codes: Q5
International Environmental AgreementsInduced technical changePollution abatementPermit marketAllocation procedures

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In this article:
Socially Optimal Emissions and Technology Transfer
Permit Trading with Noncooperative Choice of Emission Targets
Permit Trading with Cooperative Choice of Emission Targets
License Fees
Appendix A. Discussion of the Best Reply Functions ¯Α(¯Β)
Appendix B. Results for Payoff Functions of Type (5)


We analyze the incentives for polluting firms to diffuse and adopt advanced abatement technology under a system of tradable discharge permits in an international framework. With respect to the choice of the emission target we consider two settings. In the first setting, each country chooses its national emission target (and thereby the initial national permit endowment) noncooperatively. In the second setting, the global emission target is chosen cooperatively. The corresponding national endowments are determined according to a proportional emission reduction of baseline emissions. In both scenarios we consider three variants of permit allocation procedures (auctioning, benchmarking, and grandfathering).

We show that in both settings it depends on the permit allocation rule, whether the innovator promotes diffusion, taking into account the repercussion effects on environmental regulation.