Skip to main content
Article thumbnail
Location of Repository

Carbon leakage: Grandfathering as an incentive device to avert relocation

By Robert C. Schmidt


Emission allowances are often distributed for free in an early phase of a cap-and-trade scheme (grandfathering) to reduce adverse effects on the profitability of firms. If the grandfathering scheme is phased out over time, firms may nevertheless relocate to countries with a lower carbon price once the competitive disadvantage of their home industry becomes sufficiently high. We show that this is not necessarily the case. A temporary grandfathering policy can be a sufficient instrument to avert relocation in the long run, even if immediate relocation would be profitable in the absence of grandfathering. A necessary condition for this is that the permit price triggers investments in low-carbon technologies or abatement capital.climate policy; emissions trading; grandfathering; leakage; cap-and-trade

OAI identifier:

Suggested articles


  1. (2005). Options for Emissions Allowance Allocation under the EU Emissions Trading Scheme. Mitigation and Adaptation Strategies for Global Change,
  2. (2003). Regulating stock externalities under uncertainty.

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