Emissions Trading and Profit-Neutral Grandfathering

Cameron J. Hepburn (), John K.-H. Quah () and Robert A. Ritz

No 295, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: This paper examines the amount of grandfathering needed for an emissions trading scheme (ETS) to have a neutral impact on firm profits. We provide a simple formula to calculate profit-neutral grandfathering in a Cournot model with firms of different sizes and a general demand function. Using this formula, we obtain estimates of profit-neutral grandfathering for the electricity, cement, newsprint and steel industries. Under the current EU ETS, firms obtain close to full grandfathering; we show that while this may still leave some firms worse off, others have probably benefitted substantially. We find no evidence that any industry as a whole could be worse off with full grandfathering. We also show that the common presumption that a higher rate of cost pass-through lowers profit-neutral grandfathering is unreliable

Keywords: Emissions Trading; Emissions Permits; Grandfathering Firm Profits; Cost Pass-Through; Market Structure (search for similar items in EconPapers)
JEL-codes: D43 H23 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env, nep-pbe and nep-res
Date: Written 2006
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