On the Empirical Content of Carbon Leakage Criteria in the EU Emissions Trading Scheme

28 Pages Posted: 4 Dec 2013 Last revised: 5 Apr 2014

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 de Preux

Imperial College Business School

Ulrich J. Wagner

University of Mannheim - Department of Economics

Date Written: April 4, 2014

Abstract

The EU Emissions Trading Scheme continues to exempt industries deemed at risk of carbon leakage from permit auctions. Carbon leakage risk is established based on the carbon intensity and trade exposure of each 4-digit industry. Using a novel measure of carbon leakage risk obtained in interviews with almost 400 managers at regulated firms in six countries, we show that carbon intensity is strongly correlated with leakage risk whereas overall trade exposure is not. In spite of this, most exemptions from auctioning are granted to industries with high trade exposure to developed and less developed countries. Our analysis suggests two ways of tightening the exemption criteria without increasing relocation risk among non-exempt industries. The first one is to exempt trade exposed industries only if they are also carbon intensive. The second one is to consider exposure to trade only with less developed countries. By modifying the carbon leakage criteria along these lines, European governments could raise additional revenue from permit auctions of up to €3 billion per year, based on a permit price of €30.

Keywords: Carbon leakage, industrial relocation, emissions trading, EU ETS, permit allocation, firm data

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

Suggested Citation

Martin, Ralf and Muûls, Mirabelle and de Preux, Laure and Wagner, Ulrich J., On the Empirical Content of Carbon Leakage Criteria in the EU Emissions Trading Scheme (April 4, 2014). Available at SSRN: https://ssrn.com/abstract=2362820 or http://dx.doi.org/10.2139/ssrn.2362820

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 De Preux

Imperial College Business School ( email )

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

Ulrich J. Wagner (Contact Author)

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

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