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

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  • Guy Meunier

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, ALISS - Alimentation et sciences sociales - Institut national de la recherche agronomique (INRA) : UR1303)

  • Jean-Pierre Ponssard

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

  • Philippe Quirion

    ()
    (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - AgroParisTech)

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    Abstract

    Competitiveness and carbon leakage are major concerns for the design of CO2 emissions permits markets. In absence of a global carbon tax and of border carbon adjustments, output based allocation is a third best solution and is actually implemented (Australia, California, New Zealand). The EU has followed a diff erent route; free allowances are allocated to existing or new capacities in proportion to a benchmark independent of actual production. This paper compares these two schemes and shows that the optimal one is actually a combination of both schemes, or output based allocation alone if uncertainty is limited. A key assumption of our analysis is that the short term import pressure depends both on the existing capacities and the level of demand, which is typical in capital intensive and internationally traded sectors. A calibration of the model is used to discuss the EU scheme for the cement sector in the third phase of the EU-ETS (2013-2020). This allows for a quanti cation of various policies in terms of welfare, investment, production, fi rms profi ts, public revenues and leakage.

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    Bibliographic Info

    Paper provided by HAL in its series CIRED Working Papers with number hal-00672907.

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    Date of creation: 22 Feb 2012
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    Handle: RePEc:hal:ciredw:hal-00672907

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    1. Guy Meunier & Jean-Pierre Ponssard, 2013. "Capacity decisions with demand fluctuations and carbon leakage," Working Papers hal-00347650, HAL.
    2. Christina Hood, 2010. "Reviewing Existing and Proposed Emissions Trading Systems," IEA Energy Papers 2010/13, OECD Publishing.
    3. repec:hal:ciredw:hal-00866444 is not listed on IDEAS
    4. Sijm, J. & Neuhoff, K. & Chen, Y., 2006. "CO2 cost pass through and windfall profits in the power sector," Cambridge Working Papers in Economics 0639, Faculty of Economics, University of Cambridge.
    5. repec:hal:wpaper:hal-00866444 is not listed on IDEAS
    6. Bovenberg, A.L. & Goulder, L.H. & Jacobson, M.R., 2006. "Costs of Alternative Environmental Policy Instruments in the Presence of Industry Compensation Requirements," Discussion Paper 2006-127, Tilburg University, Center for Economic Research.
    7. Monjon, Stéphanie & Quirion, Philippe, 2010. "How to design a border adjustment for the European Union Emissions Trading System?," Energy Policy, Elsevier, vol. 38(9), pages 5199-5207, September.
    8. Rolf Golombek & Sverre A.C. Kittelsen & Knut Einar Rosendahl, 2011. "Price and welfare effects of emission quota allocation," Discussion Papers 661, Research Department of Statistics Norway.
    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, vol. 0(Number 4), pages 91-114.
    10. 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.
    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. Monjon, Stéphanie & Quirion, Philippe, 2011. "Addressing leakage in the EU ETS: Border adjustment or output-based allocation?," Ecological Economics, Elsevier, vol. 70(11), pages 1957-1971, September.
    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 0642, Faculty of Economics, University of Cambridge.
    14. De Perthuis, Christian & Convery, Frank J. & Ellerman, Denny, 2010. "Pricing carbon : the European Union Emissions Trading Scheme," Economics Papers from University Paris Dauphine 123456789/10174, Paris Dauphine University.
    15. 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, vol. 96(1), pages 321-338, March.
    16. Fischer, Carolyn & Fox, Alan K., 2009. "Comparing Policies to Combat Emissions Leakage: Border Tax Adjustments versus Rebates," Discussion Papers dp-09-02, Resources For the Future.
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