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Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme

  • Ralf Martin
  • Mirabelle Muûls
  • Ulrich J. Wagner
  • Laure B. de Preux

When industry compensation is offered to prevent relocation of regulated firms, efficiency requires that payments be distributed across firms so as to equalize marginal relocation probabilities, weighted by the damage caused by relocation. We formalize this fundamental economic logic and apply it to analyze industry compensation rules proposed under the EU Emissions Trading Scheme, which allocate permits for free to carbon and trade intensive industries. We estimate that this practice will result in overcompensation in the order of €6.7 billion every year. Efficient allocation would reduce the aggregate risk of job loss by two thirds without increasing aggregate compensation.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1150.

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Date of creation: Jun 2012
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Handle: RePEc:cep:cepdps:dp1150
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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