Work

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

Year: 2014

Type: article

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. (JEL H23, Q52, Q53, Q54, Q58)

Source: American Economic Review

DOI: 10.1257/aer.104.8.2482

Authors: Ralf Martin, Mirabelle Muûls, Laure B. de Preux, Ulrich J. Wagner

Institutions: Imperial College London, Universidad Carlos III de Madrid

Language: English

Topic: Climate Change Policy and Economics

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Funders: Leverhulme Trust, RWTH Aachen University, Economic and Social Research Council