Climate policy under firm relocation: The implications of phasing out free allowances
The allocation of free allowances for firms belonging to the carbon leakage list of the European Union Emissions Trading Scheme (EU ETS) was found to lead to substantial overcompensation, which is why some stakeholders recently have called for a phasing out of free allowances in the near term. This paper analyzes the consequences of phasing out free allowances in a dynamic two-period model when one group of countries unilaterally implements climate policies such as an emissions trading scheme. A carbon price induces firms to invest in abatement capital, but may also lead to the relocation of some firms. The social planner addresses the relocation problem by offering firms transfers, i.e. free allowances, conditional on maintaining the production in the regulating country. If transfers are unrestricted in both periods, then the social planner can implement the first best by setting the carbon price equal to the marginal environmental damage and using transfers to prevent any relocation. However, if transfers in the future period are restricted, it is optimal to implement a declining carbon price path with the first period price exceeding the marginal environmental damage. A high carbon price triggers investments in abatement capital and thus creates a lock-in effect. With a larger abatement capital stock, firms are less affected by carbon prices in the future and therefore less prone to relocate in the second period where transfers are restricted.
|Date of creation:||2016|
|Contact details of provider:|| Postal: Garystr. 21, 14195 Berlin (Dahlem)|
Phone: (030) 838 2272
Fax: (030) 838 2129
Web page: http://www.wiwiss.fu-berlin.de/en/index.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Amundsen, Eirik S. & Schob, Ronnie, 1999.
"Environmental taxes on exhaustible resources,"
European Journal of Political Economy,
Elsevier, vol. 15(2), pages 311-329, June.
- Amundsen, E.S. & Schob, R., 1999. "Environmental Taxes on Exhaustible Resources," Norway; Department of Economics, University of Bergen 192, Department of Economics, University of Bergen.
- Markusen James R. & Morey Edward R. & Olewiler Nancy D., 1993. "Environmental Policy when Market Structure and Plant Locations Are Endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 24(1), pages 69-86, January.
- James R. Markusen & Edward R. Morey & Nancy Olewiler, 1991. "Environmental Policy When Market Structure and Plant Locations are Endo-genous," NBER Working Papers 3671, National Bureau of Economic Research, Inc.
- John A. List & Daniel L. Millimet & Per G. Fredriksson & W. Warren McHone, 2003. "Effects of Environmental Regulations on Manufacturing Plant Births: Evidence from a Propensity Score Matching Estimator," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 944-952, November.
- Per Fredriksson & John List & Warren McHone & Daniel Millimet, 2003. "Effects of Environmental Regulations on Manufacturing Plant Births: Evidence from a Propensity Score Matching Estimator," Natural Field Experiments 00501, The Field Experiments Website.
- Petrakis, Emmanuel & Xepapadeas, Anastasios, 2003. "Location decisions of a polluting firm and the time consistency of environmental policy," Resource and Energy Economics, Elsevier, vol. 25(2), pages 197-214, May.
- Ralf Martin & Mirabelle Mu?ls & Laure B. de Preux & Ulrich J. Wagner, 2014. "Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme," American Economic Review, American Economic Association, vol. 104(8), pages 2482-2508, August.
- Ralf Martin & Mirabelle Muûls & Ulrich J. Wagner & Laure B. de Preux, 2012. "Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme," CEP Discussion Papers dp1150, Centre for Economic Performance, LSE.
- Ralf Martin & Mirabelle Muûls & Laure B. de Preux & Ulrich J. Wagner, 2013. "Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme," NBER Working Papers 19097, National Bureau of Economic Research, Inc.
- Ralf Martin & Mirabelle Muuls & Laure B. de Preux & Ulrich J. Wagner, 2014. "Industry compensation under relocation risk: a firm-level analysis of the EU emissions trading scheme," LSE Research Online Documents on Economics 59312, London School of Economics and Political Science, LSE Library.
- Ralf Martin & Mirabelle Mu�ls & Laure B. de Preux & Ulrich J. Wagner, 2012. "Industry compensation under relocation risk: a firm-level analysis of the EU Emissions Trading Scheme," GRI Working Papers 85, Grantham Research Institute on Climate Change and the Environment.
- Greaker, Mads, 2003. "Strategic environmental policy when the governments are threatened by relocation," Resource and Energy Economics, Elsevier, vol. 25(2), pages 141-154, May.
- Schmidt, Robert C. & Heitzig, Jobst, 2014. "Carbon leakage: Grandfathering as an incentive device to avert firm relocation," Journal of Environmental Economics and Management, Elsevier, vol. 67(2), pages 209-223.
- Markusen, James R. & Morey, Edward R. & Olewiler, Nancy, 1995. "Competition in regional environmental policies when plant locations are endogenous," Journal of Public Economics, Elsevier, vol. 56(1), pages 55-77, January.
- Michael Rauscher, 1995. "Environmental regulation and the location of polluting industries," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 2(2), pages 229-244, August.
- Naughton, Helen T., 2014. "To shut down or to shift: Multinationals and environmental regulation," Ecological Economics, Elsevier, vol. 102(C), pages 113-117.
- Masako Ikefuji & Jun-ichi Itaya & Makoto Okamura, 2009. "Optimal emission tax with endogenous location choice of duopolistic firms," ISER Discussion Paper 0762, Institute of Social and Economic Research, Osaka University.
- Masako Ikefuji & Jun-ichi Itaya & Makoto Okamura, 2010. "Optimal Emission Tax with Endogenous Location Choice of Duopolistic Firms," Working Papers 2010.6, Fondazione Eni Enrico Mattei.
- Ulph, Alistair & Valentini, Laura, 2001. " Is Environmental Dumping Greater When Plants Are Footloose?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(4), pages 673-688, December.
- Ulph, A. & Valentini, L., 1997. "Plant location and strategic environmental policy with inter-sectoral linkages," Resource and Energy Economics, Elsevier, vol. 19(4), pages 363-383, November.
- Brian R. Copeland & M. Scott Taylor, 1994. "North-South Trade and the Environment," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 755-787.
- Hoel, Michael, 1997. " Environmental Policy with Endogenous Plant Locations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(2), pages 241-259, June.
- Ottar Mæstad, 2001. "Efficient Climate Policy with Internationally Mobile Firms," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 19(3), pages 267-284, July.
- Martin Pollrich & Robert Schmidt, 2014. "Unobservable investments, limited commitment, and the curse of firm relocation," Working Papers 2014004, Berlin Doctoral Program in Economics and Management Science (BDPEMS).
- Baomin Dong & Jiong Gong & Xin Zhao, 2012. "FDI and environmental regulation: pollution haven or a race to the top?," Journal of Regulatory Economics, Springer, vol. 41(2), pages 216-237, April.
- Kellenberg, Derek K., 2009. "An empirical investigation of the pollution haven effect with strategic environment and trade policy," Journal of International Economics, Elsevier, vol. 78(2), pages 242-255, July. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:zbw:fubsbe:201625. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.