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  3. American Economic Review
  4. August 2014
  5. Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme

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

  • Ralf Martin
  • Mirabelle Muûls
  • Laure B. de Preux
  • Ulrich J. Wagner
American Economic Review
vol. 104, no. 8, August 2014
(pp. 2482-2508)
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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.

Citation

Martin, Ralf, Mirabelle Muûls, Laure B. de Preux, and Ulrich J. Wagner. 2014. "Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme." American Economic Review, 104 (8): 2482-2508. DOI: 10.1257/aer.104.8.2482

Additional Materials

JEL Classification

  • H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
  • Q52 Pollution Control Adoption Costs; Distributional Effects; Employment Effects
  • Q53 Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
  • Q54 Climate; Natural Disasters; Global Warming
  • Q58 Environmental Economics: Government Policy