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

Author

Listed:
  • Guy Meunier
  • Jean-Pierre Ponssard
  • Philippe Quirion

Abstract

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.

Suggested Citation

  • Guy Meunier & Jean-Pierre Ponssard & Philippe Quirion, 2012. "Carbon Leakage and Capacity-Based Allocations. Is the EU right?," CESifo Working Paper Series 4029, CESifo.
    • Handle: RePEc:ces:ceswps:_4029
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    More about this item

    Keywords

    cap and trade; output based allocation; subsidization of capacity; climate policy; carbon leakage; competitiveness;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L74 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Construction

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