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EU ETS, free allocations, and activity level thresholds: the devil lies in the details

Branger, Frédéric, Ponssard, Jean-Pierre, Sartor, Oliver and Sato, Misato (2015) EU ETS, free allocations, and activity level thresholds: the devil lies in the details. Journal of the Association of Environmental and Resource Economists, 2 (3). pp. 401-437. ISSN 2333-5955

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Identification Number: 10.1086/682343

Abstract

It is well known that discontinuous jumps or thresholds in tax or subsidies are socially inefficient, because they create incentives to make strategic behavioural changes that lead to substantial increases in private benefits. This paper investigates these distortions in the context of the EU Emissions Trading Scheme, where activity level thresholds (ALTs) were introduced in Phase 3 to reduce the overallocation of free allowances to low-activity installations. Using installation-level data, we find evidence that cement producers indeed respond to such thresholds when confronted with low demand, by strategically adjusting output to obtain more free allocation. We estimate that in 2012, ALTs induced excess cement clinker production of 6.4 Mt (5% of total EU output), and in affected regions this further distorted trade patterns and reversed carbon intensity improvements. As intended, ALTs reduced free allocation by 4%; however, a linear scheme (output-based allocation) would have achieved a 32% reduction.

Item Type: Article
Official URL: http://www.press.uchicago.edu/ucp/journals/journal...
Additional Information: © 2015 The Association of Environmental and Resource Economists
Divisions: Grantham Research Institute
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > H Social Sciences (General)
JEL classification: D - Microeconomics > D2 - Production and Organizations > D24 - Production; Cost; Capital and Total Factor Productivity; Capacity
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production
L - Industrial Organization > L6 - Industry Studies: Manufacturing > L61 - Metals and Metal Products; Cement; Glass; Ceramics
Sets: Research centres and groups > Grantham Research Institute on Climate Change and the Environment
Date Deposited: 28 Aug 2015 13:36
Last Modified: 20 Feb 2019 11:23
Projects: ANR-11-IDEX-0003-02, 308481 (ENTRACTE), ES/K006576/1
Funders: ANR/Investissements, European Community’s Seventh Framework Programme, Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/63354

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