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Output-Based Emissions Allowances and the Equity-Efficiency Trade-off

  • Yazid Dissou

    ()

    (Department of Economics, University of Ottawa)

Emissions trading with output-based allocation (OBA) of emissions allowances is gaining popularity as a means to address sectoral equity issues related to the use of market-based instruments in pollution control. Using a dynamic general equilibrium framework, this paper assesses the potential equity-efficiency trade-off between OBA and alternative emissions trading systems, with special attention to the heterogeneity among energy-intensive industries. Because abatement is achieved at a higher marginal cost with OBA, it is less efficient than emissions trading systems in which permit revenues are used to reduce payroll taxes. Nonetheless, the implicit output subsidy in OBA improves the distributional outcome of the abatement policy to the benefit of energy-intensive industries as a whole. The simulation results also suggest that energy-intensive industries that do not produce energy would be the main beneficiaries of OBA. In the new carbonconstrained environment, energy intensive industries that produce energy could not benefit significantly from OBA.

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Paper provided by University of Ottawa, Department of Economics in its series Working Papers with number 0505E.

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Length: 31 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:ott:wpaper:0505e
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  1. Minoru Kitahara & Toshihiro Matsumura, 2006. "Realized Cost-Based Subsidies For Strategic R&D Investments With "Ex Ante" And "Ex Post" Asymmetries," The Japanese Economic Review, Japanese Economic Association, vol. 57(3), pages 438-448.
  2. Miyagiwa, Kaz & Ohno, Yuka, 2002. "Uncertainty, spillovers, and cooperative R&D," International Journal of Industrial Organization, Elsevier, vol. 20(6), pages 855-876, June.
  3. Stephen Martin & John T. Scott, 1999. "The Nature of Innovation Market Failure and the Design of Public Support for Private Innovation," CIE Discussion Papers 1999-02, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  4. Isabel Busom, 2000. "An Empirical Evaluation of The Effects of R&D Subsidies," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 9(2), pages 111-148.
  5. Ekholm, Karolina & Torstensson, Johan, 1996. "High-Technology Subsidies in General Equilibrium: A Sector-Specific Approach," Working Paper Series 467, Research Institute of Industrial Economics.
  6. Poyago-Theotoky, Joanna, 1998. "R&D Competition in a Mixed Duopoly under Uncertainty and Easy Imitation," Journal of Comparative Economics, Elsevier, vol. 26(3), pages 415-428, September.
  7. Lakdawalla, Darius & Sood, Neeraj, 2004. "Social insurance and the design of innovation incentives," Economics Letters, Elsevier, vol. 85(1), pages 57-61, October.
  8. Klette, T.J. & Moen, J. & Griliches, Z., 1999. "Do Subsidies to Commercial R&D Reduce Market Failures? Microeconometric Evaluation Studies," Papers 16/99, Norwegian School of Economics and Business Administration-.
  9. Petrakis, Emmanuel & Poyago-Theotoky, Joanna, 2002. "R&D Subsidies versus R&D Cooperation in a Duopoly with Spillovers and Pollution," Australian Economic Papers, Wiley Blackwell, vol. 41(1), pages 37-52, March.
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