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On the Design of Optimal Grandfathering Schemes for Emission Allowances

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Author Info
Böhringer, Christoph
Lange, Andreas

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Abstract

To meet its commitment under the Kyoto Protocol, the EU plans to implement an emissions trading system with grandfathering of allowances. Besides having distributional impacts, the choice of the grandfathering scheme may affect efficiency if firms anticipate how future allocations depend on upcoming decisions. In this paper, we determine central design rules for optimal grandfathering within a simple two-period model. We find that for (small) open trading systems, where allowance prices are exogenous, first-best second-period grandfathering schemes must not depend on firm-specific decisions in the first period. Second-best schemes correspond to a Ramsey rule of optimal tax differentiation and are generally based on both previous emissions and output. However, of closed emissions trading systems, i.e. endogeneous allowance prices, first- and second-best rules coincide and must not depend on previous output levels. They consist of an assignment proportional to the emissions in the first period plus a term which does not depend on firm-specific decisions in either of the two periods. --

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 03-08.

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Date of creation: 2003
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Handle: RePEc:zbw:zewdip:909

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Related research
Keywords: emissions trading; grandfathering; efficiency;

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Find related papers by JEL classification:
Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

Cited by:
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  1. DE LA CROIX, David & GOSSERIES, Axel, 2006. "Population policy through tradable procreation entitlements," CORE Discussion Papers 2006081, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
    Other versions:
  2. Böhringer, Christoph & Hoffmann, Tim & de Lara Pe?ate, Casiano Manrique, 2005. "The Efficiency Costs of Separating Carbon Markets Under the EU Emissions Trading Scheme : A Quantitative Assessment for Germany," ZEW Discussion Papers 05-06, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  3. Böhringer, Christoph & Lange, Andreas, 2003. "Efficiency, Compensation, and Discrimination : What is at Stake When Implementing the EU Emissions Trading Scheme?," ZEW Discussion Papers 03-73, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  4. Löschel, Andreas & Alexeeva-Talebi, Victoria & Mennel, Tim, 2008. "Climate Policy and the Problem of Competitiveness: Border Tax Adjustments or Integrated Emission Trading?," ZEW Discussion Papers 08-061, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  5. Böhringer, Christoph & Lange, Andreas, 2004. "Mission Impossible !? : On the Harmonization of National Allocation Plans under the EU Emissions Trading Directive," ZEW Discussion Papers 04-15, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
    Other versions:
  6. Théophile T. Azomahou & Raouf Boucekkine & Phu Nguyen-Vanc, 2009. "Promoting clean technologies under imperfect competition," Working Papers 2009_06, Department of Economics, University of Glasgow. [Downloadable!]
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  7. Böhringer, Christoph & Lange, Andreas, 2003. "Economic Implications of Alternative Allocation Schemes for Emission Allowances : A Theoretical and Applied Analysis," ZEW Discussion Papers 03-22, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  8. Jon Strand, 2008. "Importer and Producer Petroleum Taxation: A Geo-Political Model," IMF Working Papers 08/35, International Monetary Fund. [Downloadable!]
  9. Kampas, Athanasios & Mamalis, Spyridon, 2006. "Assessing the Distributional Impacts of Transferable Pollution Permits: The Case of Phosphorus Pollution Management at a River Basin Scale," Agricultural Economics Review, Greek Association of Agricultural Economists, vol. 7(2), August. [Downloadable!]
  10. Torstein Bye and Annegrete Bruvoll, 2008. "Multiple instruments to change energy behaviour: The emperor’s new clothes?," Discussion Papers 549, Research Department of Statistics Norway. [Downloadable!]
  11. Katrin Rehdanz & Richard S.J. Tol, 2004. "On Multi-Period Allocation Of Tradable Emission Permits," Working Papers FNU-43, Research unit Sustainability and Global Change, Hamburg University, revised Apr 2004. [Downloadable!]
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