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Carbon leakage: Grandfathering as an incentive device to avert relocation

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  • Schmidt, Robert C.

Abstract

Emission allowances are often distributed for free in an early phase of a cap-and-trade scheme (grandfathering) to reduce adverse effects on the profitability of firms. If the grandfathering scheme is phased out over time, firms may nevertheless relocate to countries with a lower carbon price once the competitive disadvantage of their home industry becomes sufficiently high. We show that this is not necessarily the case. A temporary grandfathering policy can be a sufficient instrument to avert relocation in the long run, even if immediate relocation would be profitable in the absence of grandfathering. A necessary condition for this is that the permit price triggers investments in low-carbon technologies or abatement capital.

Suggested Citation

  • Schmidt, Robert C., 2010. "Carbon leakage: Grandfathering as an incentive device to avert relocation," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 300, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  • Handle: RePEc:trf:wpaper:300
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    File URL: https://epub.ub.uni-muenchen.de/13254/1/300.pdf
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    More about this item

    Keywords

    climate policy; emissions trading; grandfathering; leakage; cap-and-trade;

    JEL classification:

    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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