Sustainable allocation of greenhouse gas emission permits for firms with Leontief technologies

Abstract

In this paper we deal with production situations where a cap or limit to the amount of greenhouse gas emissions permitted is imposed. Fixing a tax for each ton of pollutant emitted is also considered. We use bankruptcy rules to define cooperative games with externalities associated with these situations and analyze the existence of coalitionally stable allocations of the emission permits. We prove that the constrained equal awards (CEA) rule provides stable allocations and as a direct mechanism, it is incentive compatible. These two facts have interesting managerial implications to control pollution emissions.