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Pollution Permit Market and International Trade-Exposed Sector: Differentiated Allocations versus Border Adjustment

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  • Michel Mougeot
  • Florence Naegelen

Abstract

To limit the loss of competitiveness when domestic firms are subject to stronger regulation than international competitors, a cap-and-trade policy can be associated either with partial grandfathering or with border adjustment. We compare the two policies from a domestic social-welfare point of view when distributional concerns matter. We exhibit the conditions under which these policies have to be implemented, and we show that exportside border adjustment welfare-dominates partial grandfathering. However, the former policy results in a higher profit in the export sector but both a lower consumer surplus and lower profits of domestic-market-oriented firms.

Suggested Citation

  • Michel Mougeot & Florence Naegelen, 2020. "Pollution Permit Market and International Trade-Exposed Sector: Differentiated Allocations versus Border Adjustment," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 176(3), pages 473-495.
    • Handle: RePEc:mhr:jinste:urn:doi:10.1628/jite-2020-0031
    DOI: 10.1628/jite-2020-0031
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    Keywords

    asymmetric regulation; border adjustment; exposed industries; grand-fathering; pollution permits;
    All these keywords.

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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