Pollution permits and compliance strategies

Jean Jacques Laffont, Jean Tirole*

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    78 Scopus citations


    This paper analyzes the impact of spot and futures markets for tradeable pollution permits on the potential polluters' compliance decisions. Polluters can buy permits, invest in pollution abatement, or else stop production or source out. We show that stand-alone spot markets induce excessive investment. The introduction of a futures market reduces this incentive to invest, but is not the optimal way to control pollution. A menu of options on pollution rights, possibly coupled with intertemporally bundled sales, yields higher welfare. Because of its focus on long-run demand elasticities and rent extraction, this paper can be applied to a variety of situations such as demand-side management, public transportation, bypass in telecommunications, or forward sales by a private monopolist.

    Original languageEnglish (US)
    Pages (from-to)85-125
    Number of pages41
    JournalJournal of Public Economics
    Issue number1-2
    StatePublished - Oct 1996


    • Asymmetric information
    • Environment
    • Pollution permits
    • Regulation

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics


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