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

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  • Ralf Martin
  • Mirabelle Muûls
  • 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.

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  • Ralf Martin & Mirabelle Muûls & Laure B. de Preux & Ulrich J. Wagner, 2013. "Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme," NBER Working Papers 19097, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19097
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    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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