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Distributing the Value of a Country’s Tradeable Carbon Permits

  • Pezzey, John C.V.

A general proposal is made for initially distributing the total value of tradeable carbon permits in a developed country, which tries to balance allocative and informational efficiency, political acceptability, and equity. Because of the macroeconomic significance of carbon, the proposal is quite different from and more complex than, say, the distribution used for SO2 permits in the US sulphur trading programme. We suggest that acceptability requires a political (but not legal) principle of compensating for the profit that an industry loses because of carbon control. However, fossil fuel demand is relatively inelastic, so making all permits free (grandfathered) to industries while reducing total carbon use would give them large monopoly profits which would overcompensate for their losses. Compensation therefore requires only a small proportion (much less than half) of an industry’s carbon permits to be free. Remaining permits would be auctioned, or given free to households. If a sizeable part of permits is auctioned with revenues recycled as lower rates of corporate and/or personal income tax, then most firms outside the fossil fuel industries would benefit from carbon control, and so need no compensation. We argue that consumers also deserve compensation for higher prices of fuel and carbonintensive products. The split of such compensation between lump sums (free permits or cash) and personal tax cuts depends on the desired balance between equity and efficiency. Arguments are also discussed for distributing permit value as assistance to workers that face unemployment caused by carbon control. Many other details of a distribution scheme are discussed, such as where permits should be acquitted, whether free permits distort competition, whether foreign-owned firms should get free permits, and whether free permits should be phased out.

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Paper provided by Australian Agricultural and Resource Economics Society in its series 2001 Conference (45th), January 23-25, 2001, Adelaide with number 125832.

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Date of creation: Jan 2001
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Handle: RePEc:ags:aare01:125832
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