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Economic Implications of Alternative Allocation Schemes for Emission Allowances: A Theoretical and Applied Analysis

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  • Böhringer, Christoph
  • Lange, Andreas

Abstract

Political feasibility of emission trading systems may crucially depend on the free initial allocation of emission allowances to energy-intensive industries in order to ameliorate adverse production and employment effects. We investigate the potential trade-off between such compensation and economic efficiency for alternative allocation rules where emission allowances are based on either emissions or output. Based on analytical partial equilibrium and numerical general equilibrium analysis, we show that in open trading systems the trade-off becomes the more severe, the higher the international permit price is. Whenever the permit price can be considered exogenous to firms or industries, the output-based allocation rule is distinctly less costly than the emission-based rule to preserve output and employment in energy-intensive sectors. The reason is that emission-based allocation of allowances not only provides an implicit output subsidy but also lowers the effective price of emission inputs to regulated firms. Emissionbased allocation is particularly expensive towards higher international permit prices where the implicit subsidies to emission use in energy-intensive sectors produce drastic efficiency losses, since they imply high expenditures for carbon permit imports rather than high net revenues from efficient carbon permit exports. --

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Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 03-22.

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Date of creation: 2003
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Handle: RePEc:zbw:zewdip:1340

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Keywords: computable general equilibrium; emissions trading; allowance allocation;

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  1. Jensen, Jesper & Rasmussen, Tobias N., 2000. "Allocation of CO2 Emissions Permits: A General Equilibrium Analysis of Policy Instruments," Journal of Environmental Economics and Management, Elsevier, vol. 40(2), pages 111-136, September.
  2. Christoph Böhringer & Carsten Vogt, 2003. "Economic and environmental impacts of the Kyoto Protocol," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 475-496, May.
  3. Ian W. H. Parry & Roberton C. Williams III & Lawrence H. Goulder, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," NBER Working Papers 5967, National Bureau of Economic Research, Inc.
  4. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer, vol. 2(2), pages 157-183, August.
  5. Böhringer, Christoph & Lange, Andreas, 2003. "On the Design of Optimal Grandfathering Schemes for Emission Allowances," ZEW Discussion Papers 03-08, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Fischer, Carolyn, 2001. "Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards," Discussion Papers dp-01-22, Resources For the Future.
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