Abstract:

When industry compensation is offered to prevent relocation of regulated firms, 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 analyze industry compensation rules proposed under the EU Emissions Trading Scheme, which allocate permits for free to carbon and trade intensive industries. We estimate that this practice will result in overcompensation in the order of €6.7 billion every year. Efficient allocation would reduce the aggregate risk of job loss by two thirds without increasing aggregate compensation.

On the empirical content of carbon leakage criteria in the EU Emissions Trading Scheme, Ralf Martin, Mirabelle Muuls, Laure B. de Preux and Ulrich J. Wagner, Ecological Economics, Volume 105, September 2014