Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme

79 Pages Posted: 4 Apr 2012 Last revised: 1 Nov 2013

See all articles by Ralf Martin

Ralf Martin

London School of Economics & Political Science (LSE) - Department of Economics; Imperial College Business School

Mirabelle Muûls

Imperial College Business School and Grantham Institute - Climate Change and the environment; London School of Economics - Centre for Economic Performance

Laure B. de Preux

University of York - Centre For Health Economics (CHE); London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Ulrich J. Wagner

University of Mannheim - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 31, 2013

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.

Keywords: Industry compensation, industrial relocation, emissions trading, permit allocation, EU ETS, firm data

JEL Classification: H23, H25, Q52, Q54, F18

Suggested Citation

Martin, Ralf and Muûls, Mirabelle and de Preux, Laure Bellice and Wagner, Ulrich J., Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme (October 31, 2013). Available at SSRN: https://ssrn.com/abstract=2033683 or http://dx.doi.org/10.2139/ssrn.2033683

Ralf Martin

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Mirabelle Muûls

Imperial College Business School and Grantham Institute - Climate Change and the environment ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

London School of Economics - Centre for Economic Performance ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Laure Bellice De Preux

University of York - Centre For Health Economics (CHE) ( email )

York YO10 5DD
United Kingdom

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Ulrich J. Wagner (Contact Author)

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

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