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

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...

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Bibliographic Details
Published in:The American economic review Vol. 104; no. 8; pp. 2482 - 2508
Main Authors: Martin, Ralf, Muûls, Mirabelle, de Preux, Laure B., Wagner, Ulrich J.
Format: Journal Article
Language:English
Published: Nashville American Economic Association 01.08.2014
American Economic Assoc
Subjects:
Benchmarking
Carbon
Carbon dioxide emissions
Carbon pricing
Carbon trading
Climate change
Climate change policy
Climate policy
College campuses
Compensation
Compliance
Costs
Economic theory
Emissions trading
Employment
Energy economics
Environmental policy
Free trade
Incentives
Industrial efficiency
Industrial plant emissions
Industrial regulation
Investment analysis
Location of industry
Payments
Permits
Personal finance
Pollutant emissions
Pollution control
Probability theory
Regulated industries
Regulation
Relocation
Risk
Risk management
Rules
Studies
Unemployment
Western Europe
Europe
ISSN:0002-8282, 1944-7981
Online Access:Get full text
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Summary: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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ISSN:0002-8282
1944-7981
DOI:10.1257/aer.104.8.2482