Emissions Trading and the Polluter-Pays Principle: Do Polluters Pay under Grandfathering?

Woerdman Edwin, Arcuri Alessandra and Stefano Clo ()
Additional contact information
Woerdman Edwin: University of Groningen, The Netherlands
Arcuri Alessandra: Rotterdam Institute of Law and Economics, The Netherlands

Review of Law & Economics, 2008, vol. 4, issue 2, 565-590

Abstract: Emissions trading is becoming increasingly popular in environmental law. Allowances to trade emissions can either be auctioned off or handed out free of charge by means of grandfathering. Although grandfathering is frequently used in emissions trading schemes, it is a popular view in the economic and legal literature that grandfathering is inconsistent with the polluter-pays principle. We come to a different, more nuanced view. The question of whether polluters pay under grandfathering depends on how the polluter-pays principle is interpreted. We present a taxonomy of interpretations. Based on an efficiency interpretation of the principle, consistency is demonstrated by emphasizing the economic impact of the opportunity costs of gratis allowances and the lump sum nature of the subsidy that is inherent to grandfathering. Inconsistency can only be claimed based on an equity interpretation of the polluter-pays principle. Allocating allowances free of charge means that polluting firms receive a capital gift making their shareholders richer, which may be perceived as unfair. We draw two conclusions. First, contrary to what some have claimed, grandfathering is compatible with an efficiency interpretation of the polluter-pays principle. Second, only auctioning is consistent with an extended form of this principle. Auctioning ensures not only that pollution costs are internalized (efficiency), but also that producers buy their allowances before they pass on those costs to consumers (equity).

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://doi.org/10.2202/1555-5879.1189 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:rlecon:v:4:y:2008:i:2:n:2

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/rle/html

DOI: 10.2202/1555-5879.1189

Access Statistics for this article

Review of Law & Economics is currently edited by Francesco Parisi

More articles in Review of Law & Economics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().