Problem: Suppose the government is contemplating three ways of allocating emission permits under a cap-and-trade system: grandfathering (giving companies permits based on historical emissions), benchmarking (giving companies permits based on industry-average emissions) and auctioned permits.
(a) On average, which policy/policies impose a greater burden on firms? Does the burden effect differ between clean and dirty firms (based on past emissions)?
(b) Discuss why grandfathering might create an entry barrier for an industry.