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Carbon leakage: Grandfathering as an incentive device to avert relocation

By Robert C. Schmidt

Abstract

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

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Citations

  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.

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