Carbon leakage and capacity-based allocations: Is the EU right?

Guy Meunier, Jean-Pierre Ponssard and Philippe Quirion

Journal of Environmental Economics and Management, 2014, vol. 68, issue 2, 262-279

Abstract: Competitiveness and carbon leakage are major concerns for the design of CO2 emissions permits markets. In the absence of a global carbon tax and of border carbon adjustments, output-based allocation is a third-best solution and is actually implemented (Australia, California, New Zealand). The EU has followed a different route; free allowances are allocated to existing or new capacities in proportion to a benchmark, independent of actual production. This paper compares these two schemes in a formal setting and shows that the optimal one is in fact a combination of both schemes, or output-based allocation alone if uncertainty is limited. A key assumption of our analysis is that the short-term import pressure depends both on the existing capacities and the level of demand, which is typical in capital intensive and internationally traded sectors. A calibration of the model is used to discuss the EU scheme for the cement sector in the third phase of the EU-ETS (2013–2020). This allows for a quantification of various policies in terms of welfare, investment, production, company profits, public revenues and leakage.

Keywords: Cap and trade; Output-based allocation; Subsidization of capacity; Climate policy; Carbon leakage; Competitiveness (search for similar items in EconPapers)
JEL-codes: D24 H23 L13 L74 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (53)

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Related works:
Working Paper: Carbon Leakage and Capacity-Based Allocations. Is the EU right? (2014)
Working Paper: Carbon Leakage and Capacity-Based Allocations. Is the EU right? (2014)
Working Paper: Carbon Leakage and Capacity-Based Allocations. Is the EU right? (2012)
Working Paper: Carbon leakage and Capacity-Based Allocations. Is the EU right? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:68:y:2014:i:2:p:262-279

DOI: 10.1016/j.jeem.2014.07.002

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