Carbon leakage and capacity-based allocations: Is the EU right? |
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Authors: | Guy Meunier Jean-Pierre Ponssard Philippe Quirion |
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Institution: | 1. INRA-UR1303 ALISS, 65 bd de Brandebourg 94205 Ivry-sur-Seine, France;2. CNRS-Ecole Polytechnique, route de Saclay, 91128 Palaiseau, France;3. CNRS-CIRED, 45 bis av. de la Belle Gabrielle, 94736 Nogent-sur-Marne, France |
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Abstract: | Competitiveness and carbon leakage are major concerns for the design of CO2 emissions permits markets. In the absence of a global carbon tax and of border carbon adjustments, output-based allocation is a third-best solution and is actually implemented (Australia, California, New Zealand). The EU has followed a different route; free allowances are allocated to existing or new capacities in proportion to a benchmark, independent of actual production. This paper compares these two schemes in a formal setting and shows that the optimal one is in fact a combination of both schemes, or output-based allocation alone if uncertainty is limited. A key assumption of our analysis is that the short-term import pressure depends both on the existing capacities and the level of demand, which is typical in capital intensive and internationally traded sectors. A calibration of the model is used to discuss the EU scheme for the cement sector in the third phase of the EU-ETS (2013–2020). This allows for a quantification of various policies in terms of welfare, investment, production, company profits, public revenues and leakage. |
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Keywords: | D24 L13 H23 L74 |
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