Location of Repository

The allocation of carbon permits in one country: a general equilibrium analysis of the United Kingdom

By T. Huw Edwards and John P. Hutton

Abstract

As part of the Kyoto agreement on limiting carbon emissions, from 2008 onwards an international market in auctionable carbon permits will be established. This raises the issue of whether trading should be simply between governments or between companies, or in the latter case how such permits should be allocated.\ud \ud Our paper uses the British section of a CGE model of the European energy sectors to evaluate the economics of various methods of allocating permits within a country, as discussed in Lord Marshall’s recent report to the British government. The option of allocation entirely by auction is similar to the setting of a carbon tax, and the recycling of revenues to reduce or offset other economic distortions could produce a potential net benefit to incomes and employment. 'Grandfathering' some of the permits free to large firms, according to their base year carbon emissions, would mean loss of the benefits of recycling auction revenues. This might be exacerbated if it created windfall profits repatriated by foreign shareholders. The third major alternative is to review the allocation regularly, awarding permits to all firms according to a ‘benchmark’ allocation, based on 'best practice' as estimated by outside experts. This would be similar in practice to recycling the revenue as an output subsidy to the industry, though it could be complicated to implement. Such a system could allow much of the potential ‘double dividend’ to be realised, though it might still be preferable to auction permits, with the revenues used to offset taxes across a wider spread of industry

Topics: GE
Publisher: University of Warwick, Department of Economics
Year: 1999
OAI identifier: oai:wrap.warwick.ac.uk:1635

Suggested articles

Preview

Citations

  1. (1999). Carbon abatement and its international effects in Europe including effects on other pollutants: a general equilibrium approach’.
  2. (1995). Carbon taxes with exemptions in an open economy: a general equilibrium analysis of the German tax initiative’. Mimeo, Institut fuer Energiewirtschaft und Rationelle Energieanwendung,
  3. (1998). Economic instruments and the business use of energy’.
  4. (1990). Economic Instruments for Environmental Regulation’. doi
  5. (1998). Environmental and public finance aspects of the taxation of energy’. doi
  6. (1994). Environmental Levies and Distortionary Taxes’. The American Economic Review,
  7. (1998). Equity and ecotax reform in the EU: achieving a 10 per cent reduction in CO2 emissions using excise duties’, doi
  8. (1985). General equilibrium computations of the marginal welfare costs of taxes in the United States’. doi
  9. (1998). Global CO2 emissions and unilateral action: policy implications of induced trade effects" doi
  10. L.A.(1996): ‘Controlling Greenhouse Gases: a survey of global macroeconomic studies’. doi
  11. (1998). Market performance and environmental policy’. doi
  12. (1998). Modelling the Effects of Energy Market Distortions on the Costs of Carbon Abatement: Computable general equilibrium and partial equilibrium assessment’. doi
  13. (1998). Political Economy of the Kyoto Protocol’. doi
  14. (1996). Revenue-Raising vs. Other Approaches to Environmental Protection: The Critical Significance of Pre-Existing Tax Distortions’. doi
  15. (1995). The Dual Political-Economy of Taxes and Tradable Permits’, Economics Letters, doi
  16. (1996). The GAMS-version of the Fehr-Rosenberg-Wiegard (FRW) multi-country CGE model: A user’s manual.
  17. (1971). The use of standards and prices for protection of the environment’. doi
  18. (1999). Tradable Permits and the Control of Air Pollution in the United States’, Mimeo, Colby College, Maine. Paper written for the 10 th anniversary jubilee edition of the Zeitschrift Fuer Angewandte Umweltforschung.
  19. (1998). Tradeable Carbon Permit Auctions: How and why to auction not grandfather’. Discussion paper, doi
  20. (1995). Welfare Effects of Value-Added Tax Harmonisation in Europe. doi
  21. (1997). When can carbon abatement policies increase welfare ? The fundamental role of distorted factor markets’. doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.