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Carbon Leakage and Capacity-Based Allocations. Is the EU right?

  • Guy Meunier
  • Jean-Pierre Ponssard
  • Philippe Quirion

Two main approaches have been implemented in regional CO2 markets to address competitiveness and carbon leakage: output based allocation (Australia, California, New Zealand) and capacity based allocation (EU). This paper characterizes the best policy, given that auctioning with border adjustment is excluded. A simple model is used in which the regional demand is subject to business cycles, and the import pressure depends on the demand level and capacity constraints. A combination of output and capacity based allocation is proved to be the optimal second best policy. The EU scheme for 2013-2020 is discussed, using cement as a case study.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-12/cesifo1_wp4029.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4029.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_4029
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