Working Paper: NBER ID: w19097
Authors: Ralf Martin; Mirabelle Muls; Laure B. de Preux; Ulrich J. Wagner
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.
Keywords: EU Emissions Trading Scheme; compensation; relocation risk; carbon leakage; permit allocation
JEL Codes: F18; H23; H25; Q52; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| allocation of free permits (D45) | firms' propensity to relocate (R30) |
| current practice of providing free permits (R48) | overcompensation for firms (D21) |
| efficient permit allocation (D61) | aggregate risk of job loss (J63) |
| optimal allocation of permits (D61) | risk of relocation and job loss (J63) |