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Abstract:

Journal Article
Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme
Ralf Martin, Mirabelle Muûls, Ulrich J. Wagner and Laure B. de Preux August 2014

American Economic Review 104(8), 2014
DOI: 10.1257/aer.104.8.2482
https://www.aeaweb.org/articles?id=10.1257/aer.104.8.2482


Tags: taxation and subsidies; externalities; redistributive effects; environmental taxes and subsidies; pollution control adoption costs; distributional effects; employment effects; air pollution; water pollution; noise; hazardous waste; solid waste; recycling; climate; natural disasters; global warming; environmental economics: government policy

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.

DOI: 10.1257/aer.104.8.2482
https://www.aeaweb.org/articles?id=10.1257/aer.104.8.2482