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

Ralf Martin, Mirabelle Muûls (), Laure de Preux and Ulrich Wagner

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

JEL-codes: H23 Q52 Q53 Q54 Q58 (search for similar items in EconPapers)
Date: 2014-08
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Citations: View citations in EconPapers (166)

Published in American Economic Review, August, 2014, 104(8), pp. 2482-2508. ISSN: 0002-8282

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http://eprints.lse.ac.uk/59312/ Open access version. (application/pdf)

Related works:
Journal Article: Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme (2014)
Working Paper: Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme (2013)
Working Paper: Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme (2012)
Working Paper: Industry compensation under relocation risk: a firm-level analysis of the EU Emissions Trading Scheme (2012)
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