Redistribution in Environmental Permit Markets: Transfers and Efficiency Costs with Trade Restrictions

Résumé

Regulators often impose trade restrictions in environmental permit markets to redistribute value to groups that do not directly benefit from permit trade, such as labor in regulated firms, at the expense of lowering gains from trade. I evaluate the efficiency and distributional impacts of two common trade restrictions in Iceland’s fisheries permit market: segmented trading by firm size and individual production requirements. Using detailed harvest and permit trading data linked to administrative records on worker employment and earnings, I conduct a difference-in-differences analysis showing that permit trade increases the harvest share of productive boats by 15 percentage points, shifts income from lower- to higher-income workers, and reduces aggregate labor intensity by 12%. I further demonstrate that the trade restrictions, designed to counteract these labor impacts, are binding and lower productivity. To quantify the distinct trade-offs from each restriction, I develop a model of fishery production and permit trading to simulate profits, labor demand, and worker earnings in equilibria without the restrictions. Per dollar of foregone profit, segmentation increases labor demand 20 times more than the production requirement, while the production requirement redistributes 14% more income to low-income workers than segmentation. Implementing both restrictions outperforms the production requirement alone and is preferable to segmentation alone if regulators aim to balance job creation with a compressed income distribution.