This paper examines how a politically-motivated government can behave in a domestic emissions trading scheme within a simple political economy framework. By constructing a model in which the amount of emissions cap and the distribution of emissions permits (grandfathering system or auction system) are endogenously determined, we show that a corruptible government issues inefficient amounts of emissions cap to benefit its preferable group. In particular, a pro-industry government issues too large amount of emissions cap to reduce its price, which benefits an industry group. A pro-environment government issues too small amount of emissions cap to reduce pollution emissions, which benefits an environmental group. Then, we examine how an incumbent government decides the distribution of initial permits if it will be replaced in the future by a government with a different objective. In particular, we show that a pro-welfare government which will be replaced by a corruptible government in the future chooses grandfathering system to make the amount of emissions cap chosen in the future more efficient.
経済学季報 65 (3/4), 59-78, 2016-03-31