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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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References

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Cited by:
  1. 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.
  2. Gersbach, Hans & Winkler, Ralph, 2008. "International Emission Permit Markets with Refunding," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7035, C.E.P.R. Discussion Papers.
  3. Christin, Clémence & Nicolai, Jean-Philippe & Pouyet, Jerome, 2011. "The role of abatement technologies for allocating free allowances," DICE Discussion Papers 34, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  4. Leon Vinokur, 2009. "Environmental Policy under Ambiguity," Working Papers, Queen Mary, University of London, School of Economics and Finance 638, Queen Mary, University of London, School of Economics and Finance.
  5. Cruciani, Michel & Keppler, Jan Horst, 2010. "Rents in the European Power Sector due to Carbon Trading," Economics Papers from University Paris Dauphine 123456789/2570, Paris Dauphine University.
  6. Guesnerie, Roger, 2010. "Pour une politique climatique globale - Blocage et ouvertures," Opuscules du CEPREMAP, CEPREMAP, CEPREMAP, number 20, May.

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