Using output-based allocations to manage volatility and leakage in pollution markets

Guy Meunier, Juan-Pablo Montero and Jean-Pierre Ponssard

No 489, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: utput-based allocations (OBAs) are typically used in emission trading systems (ETS) with a fixed cap to mitigate leakage in sectors at risk. Recent work has shown they may also be welfare enhancing in markets subject to supply and demand shocks by introducing some exibility in the total cap, resulting in a carbon price closer to marginal damage. We extend previous work to simultaneously include both leakage and volatility. We study how OBA permits can be implemented under an overall cap that may change with the level of production in contrast with a design that deducts OBA permits from the overall permit allocation as is the current practice in the EU-ETS and California. We show that introducing OBA permits while keeping the overall cap fixed would only increase price uctuations and induce severe welfare losses to non-OBA sectors.

JEL-codes: D24 H23 L13 L74 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Using output-based allocations to manage volatility and leakage in pollution markets (2017)
Working Paper: Using Output-Based Allocations to Manage Volatility and Leakage in Pollution Markets (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:489

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