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Emissions Trading and Profit-Neutral Grandfathering

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Author Info
Cameron Hepburn
John K.-H. Quah
Robert A. Ritz

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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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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: 2006
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Handle: RePEc:oxf:wpaper:295

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

Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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