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American Economic Review Vol. 104 No. 8 2014

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

Ralf Martin1; Mirabelle Muûls2; Laure B. de Preux3; Ulrich J. Wagner4

1 Imperial College Business School, South Kensington Campus, London SW7 2AZ, United Kingdom, Grantham Institute on Climate Change, and CEP (e-mail: ) · 2 Grantham Institute for Climate Change, South Kensington Campus, London SW7 2AZ, United Kingdom, Imperial College Business School, and CEP (e-mail: ) · 3 Imperial College Business School, South Kensington Campus, London SW7 2AZ, United Kingdom, and CEP (e-mail: ) · 4 Departamento de Economía, Universidad Carlos III de Madrid, c/ Madrid, 126, 28903 Getafe (Madrid), Spain (e-mail: )

open access

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.

DOI
10.1257/aer.104.8.2482
Volume
104
Issue
8
Pages
2482-2508
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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