Output-based allocation of emissions permits for mitigating tax and trade interactions (original) (raw)
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Competitive Distortions In An International Emissions Trading Market
2000
The objective of this paper on international greenhouse gas emissions trading is to find the conditions, if any, under which international differences in domestic permit allocation procedures lead to competitive distortions. The paper finds that grandfathered firms or sectors do not have a cost advantage over identical auctioned firms or sectors abroad, as long as markets are perfectly competitive, because they have to include the opportunity costs of using the permits in the product price. However, grandfathered permits are a capital gift to the firm, inducing a windfall profit, which implies that a similar firm abroad which has to buy its permits has a higher cash outflow and hence less financial resources. This aspect of grandfathering becomes relevant when considering imperfect competition or equity. Firstly, it is concluded that competitive distortions may arise under imperfect competition, mainly because the grandfathered firms can outlast the auctioned firms abroad in a price war. Secondly, it appears that competition (or: the level playing field) is distorted in terms of equity, because the mere process of permit allocation gives the grandfathered firms a stronger financial position and thus an unfair competitive advantage over their auctioned competitors abroad. In legal terms, these findings imply that grandfathering is WTO compatible if one is only willing to consider efficiency and assume perfect competition. However, grandfathering constitutes an actionable subsidy under WTO law if one also considers equity or if competition is imperfect, which could necessitate some level of international harmonization of domestic permit allocation rules.
Using the allocation of emission permits for Strategic Trade purposes
2011
When the market of tradable emissions permits is perfectly competitive, free allocation of permits through some discretionary rules corresponds to lump sum transfers and cannot have strategic effects. This conclusion is reversed when transactions costs are introduced in the TEP market. Transactions costs proportional to the value of permits exchanged create a gap between selling and the buying price, thus resulting in lower opportunity costs for the holder of excess permits. This can be effectively exploited by a government in order to encourage its firm to gain larger share in an international market. When costs per transaction are fixed, the above effects disappear for those firms participating in the market. For small firms, however, participation may be prohibitively expensive, turning the opportunity cost of any permits hold, equal to zero. This suggests that free permits may create strategic effects within the hands of small firms but not when granted to larger firms.
The federal government's decision to impose a minimum national price on carbon emissions has the potential to make certain businesses in the country less competitive. Specifically, there are emissions-intensive and trade-exposed industries across Canada that compete against producers from other jurisdictions where governments do not put a price on carbon. For these industries, the obligation to pay a carbon price creates a competitive disadvantage. Specifically, these businesses will face higher costs and may encounter a loss of market share to international competitors from jurisdictions that lack the same emission-control measures. That not only hurts Canadian businesses, it could also negate any emissions reductions that carbon pricing in Canada achieves on a global scale. The federal government has opted to protect such emissions-intensive, trade-exposed businesses using subsidies called output-based allocations (OBAs). This is the same system that Alberta is introducing through its forthcoming Carbon Competiveness Regulation. It also shares certain similarities with cap-and-trade programs, such as those in Ontario and Quebec, which provide free allocations of emissions permits to certain firms. OBAs are a desirable complementary policy to a carbon price as they maintain the incentive for producers to invest in production methods and facilities that are less emissions intensive. So while producers are still, nevertheless, subsidized to offset the tax burden of the carbon price, they will, under an OBA system, see greater benefits the more they work to reduce their emissions intensity. Still, to function most effectively and most efficiently, an OBA policy should follow certain key principles.
Welfare Reducing Emission Permit Trade
2002
In this paper we analyse the problem why in many simulations of the impacts of the Kyoto agreement Russia (or Former Soviet Union) appears to loose if the agreement is implemented via international emission permit markets even though with national implementation it cannot use its emission quota fully. We focus on the role of general equilibrium changes in world market prices as an explanation and show that it can, indeed, explain much of the welfare deterioration at least for Russia (Former Soviet Union). We base our quantitative analysis on the GTAP-E-model.
Emission trade and the electricity markets
2005
European countries are introducing an emission trading scheme that, overall, may result in cost savings in CO2-abatement. Emission trading may have unintended consequences, however, in integrated electricity markets. In integrated markets, the price of electricity is determined by the marginal costs of the marginal producers, while all intra-marginal producers earn profits. Emission trade raises the costs of all producers who use fossil fuels. In the integrated Nordic electricity markets, the marginal producers are also the largest emitters of greenhouse gases, usually utilising coal-fired condensation plants, which in the short run are unlikely to be entirely be replaced by less carbon-intensive plants. As it is likely that much of the cost increase can be passed to prices, emission trade is likely to increase in the market price of electricity in the integrated Nordic electricity markets. As a side effect, the profits of non-marginal producers are increased. This has been seen as ...
Greenhouse Gas Auctions and Taxes: Some Practical Considerations
SSRN Electronic Journal, 2008
Many scholars assert that "cap and trade" is an appropriate strategy for addressing climate change. Some economists have argued that auctions of greenhouse gases should be an integral part of any cap-and-trade mechanism. These economists suggest that auctions can efficiently distribute emissions allowances among firms, and potentially offset some of the deadweight costs with raising government revenues. Many environmentalists argue that revenue from auctions should be used by the government to promote reductions in greenhouse gas emissions. Similar arguments are made for greenhouse gas taxes. This paper evaluates various arguments for auctions and taxes in light of political realities. I argue that economists are likely to be overly optimistic in their support for auctions and taxes, and that many potential uses of these revenues are unlikely to result in economic benefits. I then offer some general guidance for governments on the role of auctions in a cap-and-trade mechanism and offer recommendations for participating firms. Specifically, I urge the government to compare a realistic set of policy options, while recognizing that the feasibility of different types of mechanisms can change over time. To illustrate one such comparison, I examine auctions and taxes as ways of raising revenue, and find that neither is likely to do particularly well in terms of efficiency based on history. Furthermore, I suggest that the introduction of political economy considerations may lead to an optimal level of pollution control that is lower than that suggested by conventional economic analysis.