Maria Arvaniti (University of Bologne)
We develop a theoretical model of the European Union emissions trading scheme (EU ETS) in which participants design collectively optimal policy, understanding that they will face heterogeneous political pressure to conduct more or less ambitious policy ex post. Member states can commit to an ex ante minimum requirement on complementary emission reduction technologies. If policy on these complementary technologies is designed at the Union level, this minimum requirement will also take into account the redistributive effect through permit allocation and the global externality. However, asymmetric information still distorts the emission cap away from the constrained-efficient outcome. The carbon price is distorted away from the Pigouvian level to reduce monetary transfers between member states, and to motivate biased governments to undertake more or less investment.