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

52 Pages Posted: 8 Jun 2013 Last revised: 21 Jun 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 de Preux

Imperial College Business School

Ulrich J. Wagner

University of Mannheim - Department of Economics

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Date Written: June 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.

Suggested Citation

Martin, Ralf and Muûls, Mirabelle and de Preux, Laure and Wagner, Ulrich J., Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme (June 2013). NBER Working Paper No. w19097, Available at SSRN: https://ssrn.com/abstract=2276361

Ralf Martin (Contact Author)

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

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

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