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Emissions Trading and Profit-Neutral Grandfathering

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  • Cameron Hepburn
  • John Quah
  • Robert Ritz

Abstract

This paper examines the amount of grandfathering needed for an emissions trading scheme (ETS) to have a neutral impact on firm profits. We provide a simple formula to calculate profit-neutral grandfathering in a Cournot model with firms of different sizes and a general demand function. Using this formula, we obtain estimates of profit-neutral grandfathering for the electricity, cement, newsprint and steel industries. Under the current EU ETS, firms obtain close to full grandfathering; we show that while this may still leave some firms worse off, others have probably benefitted substantially. We find no evidence that any industry as a whole could be worse off with full grandfathering. We also show that the common presumption that a higher rate of cost pass-through lowers profit-neutral grandfathering is unreliable

Suggested Citation

  • Cameron Hepburn & John Quah & Robert Ritz, 2006. "Emissions Trading and Profit-Neutral Grandfathering," Economics Series Working Papers 295, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:295
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    References listed on IDEAS

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    Cited by:

    1. Dallas Burtraw & Karen Palmer, 2008. "Compensation rules for climate policy in the electricity sector," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(4), pages 819-847.
    2. Christin, Clémence & Nicolaï, Jean-Philippe & Pouyet, Jerome, 2011. "The Role of Abatement Technologies for Allocating Free Allowances," CEPREMAP Working Papers (Docweb) 1109, CEPREMAP.
    3. Jean Pierre Ponssard & Neil Walker, 2008. "EU emissions trading and the cement sector: a spatial competition analysis," Climate Policy, Taylor & Francis Journals, vol. 8(5), pages 467-493, September.
    4. Gersbach, Hans & Winkler, Ralph, 2011. "International emission permit markets with refunding," European Economic Review, Elsevier, vol. 55(6), pages 759-773, August.
    5. Keppler, Jan Horst & Cruciani, Michel, 2010. "Rents in the European power sector due to carbon trading," Energy Policy, Elsevier, vol. 38(8), pages 4280-4290, August.
    6. Leon Vinokur, 2009. "Environmental Policy under Ambiguity," Working Papers 638, Queen Mary University of London, School of Economics and Finance.

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    More about this item

    Keywords

    Emissions Trading; Emissions Permits; Grandfathering Firm Profits; Cost Pass-Through; Market Structure;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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