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Emissions Trading and Profit-Neutral Grandfathering

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  • Cameron Hepburn
  • John Quah
  • Robert Ritz

Abstract

This paper examines the amount of grandfathering needed for an emissions trading scheme (ETS) to have a neutral impact on firm profits. We provide a simple formula to calculate profit-neutral grandfathering in a Cournot model with firms of different sizes and a general demand function. Using this formula, we obtain estimates of profit-neutral grandfathering for the electricity, cement, newsprint and steel industries. Under the current EU ETS, firms obtain close to full grandfathering; we show that while this may still leave some firms worse off, others have probably benefitted substantially. We find no evidence that any industry as a whole could be worse off with full grandfathering. We also show that the common presumption that a higher rate of cost pass-through lowers profit-neutral grandfathering is unreliable

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 295.

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Date of creation: 01 Dec 2006
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Handle: RePEc:oxf:wpaper:295

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Keywords: Emissions Trading; Emissions Permits; Grandfathering Firm Profits; Cost Pass-Through; Market Structure;

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Cited by:
  1. Keppler, Jan Horst & Cruciani, Michel, 2010. "Rents in the European power sector due to carbon trading," Energy Policy, Elsevier, vol. 38(8), pages 4280-4290, August.
  2. Gersbach, Hans & Winkler, Ralph, 2011. "International emission permit markets with refunding," European Economic Review, Elsevier, vol. 55(6), pages 759-773, August.
  3. Christin, Clémence & Nicolaï, Jean-Philippe & Pouyet, Jerome, 2011. "The Role of Abatement Technologies for Allocating Free Allowances," CEPREMAP Working Papers (Docweb) 1109, CEPREMAP.
  4. Guesnerie, Roger, 2010. "Pour une politique climatique globale - Blocage et ouvertures," Opuscules du CEPREMAP, CEPREMAP, number 20, May.
  5. Dallas Burtraw & Karen Palmer, 2008. "Compensation rules for climate policy in the electricity sector," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(4), pages 819-847.
  6. Leon Vinokur, 2009. "Environmental Policy under Ambiguity," Working Papers 638, Queen Mary, University of London, School of Economics and Finance.

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