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Economic Implications of Alternative Allocation Schemes for Emission Allowances

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  • Christoph Böhringer
  • Andreas Lange

Abstract

For reasons of political feasibility, emission trading systems may have to rely on free initial allocation of emission allowances in order to ameliorate adverse production and employment effects in dirty industries. Against the background of an emerging European‐wide emission trading system, we examine the trade‐off between such compensation and economic efficiency under output‐based and emissions‐based allocation rules. We show that the emissions‐based allocation rule is more costly than the output‐based rule in terms of maintaining output and employment in energy‐intensive industries. When the international allowance price increases, the inferiority of emissions‐based allocation vis‐à‐vis output‐based allocation becomes more pronounced, as emission subsidies drastically restrict efficiency gains from international trade in emission allowances.

Suggested Citation

  • Christoph Böhringer & Andreas Lange, 2005. "Economic Implications of Alternative Allocation Schemes for Emission Allowances," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(3), pages 563-581, September.
    • Handle: RePEc:bla:scandj:v:107:y:2005:i:3:p:563-581
    DOI: 10.1111/j.1467-9442.2005.00423.x
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    References listed on IDEAS

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    1. Fischer, Carolyn, 2001. "Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards," Discussion Papers 10709, Resources for the Future.
    2. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2001. "The Effect of Allowance Allocation on the Cost of Carbon Emission Trading," RFF Working Paper Series dp-01-30-, Resources for the Future.
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