Climate reform and transitional industry assistance: Windfall profits for polluters?

Abstract

Introducing climate change policies such as carbon pricing can bring substantial costs for fossil-fuel-fired electricity generators, with incumbents often granted a transitional allocation of free emission permits. The free allocation of emission permits and the passthrough of carbon prices to higher electricity prices has created substantial concern that these policies allow emissions-intensive firms to reap windfall profits. We use the implementation and later repeal of Australia's price on carbon to show that coal-fired plants which received free permits had a substantial increase in their profits. This result supports calls for any transitional climate policy assistance to be tied to passthrough rates in order to avoid creating wealth transfers from taxpayers to emission-intensive generator owners.

Keywords: Environmental Taxes, Cost Passthrough, Policy Grandfathering, Electric Utilities, Energy and Environmental Policy

JEL Classification: H23, L94, Q41, Q58