Industry compensation under relocation risk: a firm-level analysis of the EU emissions trading scheme

Martin, Ralf, Muuls, Mirabelle, de Preux, Laure B. and Wagner, Ulrich J. (2014) Industry compensation under relocation risk: a firm-level analysis of the EU emissions trading scheme. American Economic Review, 104 (8). pp. 2482-2508. ISSN 0002-8282

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Abstract

When regulated firms are offered compensation to prevent them from relocating, efficiency requires that payments be distributed across firms so as to equalize marginal relocation probabilities, weighted by the damage caused by relocation. We formalize this fundamental economic logic and apply it to analyzing compensation rules proposed under the EU Emissions Trading Scheme, where emission permits are allocated free of charge to carbon intensive and trade exposed industries. We show that this practice results in substantial overcompensation for given carbon leakage risk. Efficient permit allocation reduces the aggregate risk of job loss by more than half without increasing aggregate compensation.

Item Type:	Article
Official URL:	https://www.aeaweb.org/aer/index.php
Additional Information:	© 2014 American Economic Association
Divisions:	Centre for Economic Performance
Subjects:	G Geography. Anthropology. Recreation > GE Environmental Sciences H Social Sciences > HC Economic History and Conditions H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
JEL classification:	H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q52 - Pollution Control Costs; Distributional Effects; Employment Effects Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q53 - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate; Natural Disasters Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q58 - Government Policy
Date Deposited:	01 Sep 2014 15:03
Last Modified:	14 Apr 2024 16:03
Funders:	European Climate Foundation, Economic and Social Research Council (Grant #ES/J006742/1), UK Department for Energy and Climate Change, Spanish Government (SEJ2007-62908 and ECO2012-31358), British Academy, Leverhulme Trust
URI:	http://eprints.lse.ac.uk/id/eprint/59312

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