In the European Union Emissions Trading Scheme, the supply of carbon permits is determined in a decentralized manner by the Member States. Alternatively, the supply could be determined by the EU central authority. We analyze whether decentralization leads to lower total abatement costs under...

It is tricky to design local regulations on global externalities, especially so if firms are mobile. We show that when costs and outside options are firms' private information, the threat of firm relocation leads to local regulations that are stricter, not looser. This result is general and...

Tradable permits are celebrated as a political instrument since they allow (i) firms to equalize marginal abatement costs through trade and (ii) the government to distribute the burden of the policy in a politically fair and feasible way. These two concerns, however, conflict in a dynamic...