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Carbon Leakage and Capacity-Based Allocations. Is the EU right?

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  • Guy Meunier
  • Jean-Pierre Ponssard
  • Philippe Quirion

Abstract

Two main approaches have been implemented in regional CO2 markets to address competitiveness and carbon leakage: output based allocation (Australia, California, New Zealand) and capacity based allocation (EU). This paper characterizes the best policy, given that auctioning with border adjustment is excluded. A simple model is used in which the regional demand is subject to business cycles, and the import pressure depends on the demand level and capacity constraints. A combination of output and capacity based allocation is proved to be the optimal second best policy. The EU scheme for 2013-2020 is discussed, using cement as a case study.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-12/cesifo1_wp4029.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4029.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_4029

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Related research

Keywords: cap and trade; output based allocation; subsidization of capacity; climate policy; carbon leakage; competitiveness;

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References

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  1. Stéphanie Monjon & Philippe Quirion, 2010. "How to Design a Border Adjustment for the European Union Emissions Trading System?," Working Papers, Fondazione Eni Enrico Mattei 2010.36, Fondazione Eni Enrico Mattei.
  2. Lars-Hendrik R�ller & Frode Steen, 2006. "On the Workings of a Cartel: Evidence from the Norwegian Cement Industry," American Economic Review, American Economic Association, American Economic Association, vol. 96(1), pages 321-338, March.
  3. Meunier, Guy & Ponssard, Jean-Pierre, 2014. "Capacity decisions with demand fluctuations and carbon leakage," Resource and Energy Economics, Elsevier, Elsevier, vol. 36(2), pages 436-454.
  4. Ralf Martin & Mirabelle Muûls & Laure B. de Preux & Ulrich J. Wagner, 2013. "Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme," NBER Working Papers 19097, National Bureau of Economic Research, Inc.
  5. Sijm, J. & Neuhoff, K. & Chen, Y., 2006. "CO2 cost pass through and windfall profits in the power sector," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0639, Faculty of Economics, University of Cambridge.
  6. Rolf Golombek & Sverre A.C. Kittelsen & Knut Einar Rosendahl, 2011. "Price and welfare effects of emission quota allocation," Discussion Papers, Research Department of Statistics Norway 661, Research Department of Statistics Norway.
  7. Fischer, Carolyn & Fox, Alan K., 2009. "Comparing Policies to Combat Emissions Leakage: Border Tax Adjustments versus Rebates," Discussion Papers, Resources For the Future dp-09-02, Resources For the Future.
  8. Christina Hood, 2010. "Reviewing Existing and Proposed Emissions Trading Systems," IEA Energy Papers 2010/13, OECD Publishing.
  9. Lars Mathiesen and Ottar Maestad, 2004. "Climate Policy and the Steel Industry: Achieving Global Emission Reductions by an Incomplete Climate Agreement," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 4), pages 91-114.
  10. Bovenberg, A. Lans & Goulder, Lawrence H. & Jacobsen, Mark R., 2008. "Costs of alternative environmental policy instruments in the presence of industry compensation requirements," Journal of Public Economics, Elsevier, Elsevier, vol. 92(5-6), pages 1236-1253, June.
  11. Fischer, Carolyn & Fox, Alan K., 2012. "Comparing policies to combat emissions leakage: Border carbon adjustments versus rebates," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 199-216.
  12. De Perthuis, Christian & Convery, Frank J. & Ellerman, Denny, 2010. "Pricing carbon : the European Union Emissions Trading Scheme," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/10174, Paris Dauphine University.
  13. Neuhoff, K. & Keats, K. & Sato, M., 2006. "Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0642, Faculty of Economics, University of Cambridge.
  14. repec:hal:wpaper:hal-00866444 is not listed on IDEAS
  15. Monjon, Stéphanie & Quirion, Philippe, 2011. "Addressing leakage in the EU ETS : Border adjustment or output-based allocation ?," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/7346, Paris Dauphine University.
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Cited by:
  1. Ralf Martin & Mirabelle Mu?ls & Laure B. de Preux & Ulrich J. Wagner, 2014. "Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme," American Economic Review, American Economic Association, American Economic Association, vol. 104(8), pages 2482-2508, August.
  2. Guy Meunier & Jean-Pierre Ponssard & Catherine Thomas, 2013. "Capacity Investment under Demand Uncertainty: The Role of Imports in the U.S. Cement Industry," Working Papers, HAL hal-00816410, HAL.

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