Conference Agenda

The simultaneous exposure to multiple air pollutants has become an increasingly pressing concern for policymakers seeking integrated market-based instruments to address this challenge effectively. This paper develops and analyzes a multipollutant cap-and-trade system encompassing a heterogeneous population of polluting firms and an independent pollution control authority responsible for issuing multipollutant permits. Each permit bundles rights to emit multiple pollutants, differing in both type and quantity across permits. The regulatory authority is assumed to observe the aggregate distribution of firm heterogeneity, allowing for settings in which detailed information on individual firms' pollution profiles remains private. The central challenge lies in the efficient allocation of a diverse set of permits across heterogeneous firms. To address this problem, the paper employs optimal mass transportation techniques to establish the existence of an optimal allocation of permits. The resulting allocation is decentralized: equilibrium permit prices induce firms to self-select into permits, yielding a geometric characterization of firm types based on their permit choices. The interaction between the distribution of firms, the spectrum of available permits, and heterogeneity in firms' payoffs generates strategic behavior in permit selection and leads to endogenous market segmentation within the cap-and-trade framework. The analysis further examines whether separate markets for individual pollutants can replicate the outcomes achieved under a multipollutant cap-and-trade system. Finally, numerical simulations based on computational geometry and optimal transport methods illustrate the determination of equilibrium permit prices and the resulting optimal partition of demand in a multipollutant permit market.