Allocation of carbon permits within a country: a general equilibrium analysis of the United Kingdom

The Kyoto agreement includes international trade in carbon permits from 2008. We have used a CGE model to evaluate methods of allocating permits within the UK. Auctioning is broadly similar to a carbon tax, with revenues recycled to reduce other distortions. 'Grandfathering' some permits free to large firms would mean a loss of recycling and, possibly, give windfall profits to foreigners. Alternatively, regularly revised allocation, using 'best practice' estimates, would be similar to recycling revenue as an output subsidy. Such a system could allow much of the potential 'double dividend' to be realised, though an auction system might still be preferable. (C) 2001 Elsevier Science B.V. All rights reserved.