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Industry compensation under relocation risk: a firm-level analysis of the EU Emissions Trading Scheme

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  • Ralf Martin
  • Mirabelle Muûls
  • Laure B. de Preux
  • Ulrich J. Wagner

Abstract

When industry compensation is offered to prevent relocation of regulated firms, efficiency requires that payments be distributed across firms so as to equalize marginal relocation probabilities, weighted by the damage caused by relocation. We formalize this fundamental economic logic and apply it to analyze industry compensation rules proposed under the EU Emissions Trading Scheme, which allocate permits for free to carbon and trade intensive industries. We estimate that this practice will result in overcompensation in the order of €6.7 billion every year. Efficient allocation would reduce the aggregate risk of job loss by two thirds without increasing aggregate compensation.

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Bibliographic Info

Paper provided by Grantham Research Institute on Climate Change and the Environment in its series Grantham Research Institute on Climate Change and the Environment Working Papers with number 85.

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Date of creation: Jun 2012
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Handle: RePEc:lsg:lsgwps:wp85

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Cited by:
  1. Stephen Lecourt & Clement Palliere & Oliver Sartor, 2013. "Free allocations in EU ETS Phase 3: The impact of emissions-performance benchmarking for carbonintensive industry," Working Papers 1302, Chaire Economie du Climat.
  2. ZhongXiang Zhang, 2012. "Competitiveness and Leakage Concerns and Border Carbon Adjustments," CCEP Working Papers 1208, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
  3. Rosendahl, Knut Einar & Strand, Jon, 2012. "Emissions trading with offset markets and free quota allocations," Policy Research Working Paper Series 6281, The World Bank.
  4. Stephen Lecourt & Clément Pallière & Oliver Sartor, 2013. "The impact of emissions-performance benchmarking on free allocations in EU ETS Phase 3," RSCAS Working Papers 2013/17, European University Institute.
  5. repec:hal:ciredw:hal-00672907 is not listed on IDEAS
  6. repec:hal:ciredw:hal-00866408 is not listed on IDEAS
  7. repec:hal:wpaper:hal-00866408 is not listed on IDEAS
  8. Sebastian Petrick & Ulrich J. Wagner, 2014. "The Impact of Carbon Trading on Industry: Evidence from German Manufacturing Firms," Kiel Working Papers 1912, Kiel Institute for the World Economy.
  9. Guy Meunier & Jean-Pierre Ponssard & Philippe Quirion, 2012. "Carbon Leakage and Capacity-Based Allocations. Is the EU right?," CESifo Working Paper Series 4029, CESifo Group Munich.

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