Meunier, Guy Ponssard, Jean-Pierre Quirion, Philippe
Year of Publication:
CESifo Working Paper: Energy and Climate Economics 4029
Two main approaches have been implemented in regional CO2 markets to address competitiveness and carbon leakage: output based allocation (Australia, California, New Zealand) and capacity based allocation (EU). This paper characterizes the best policy, given that auctioning with border adjustment is excluded. A simple model is used in which the regional demand is subject to business cycles, and the import pressure depends on the demand level and capacity constraints. A combination of output and capacity based allocation is proved to be the optimal second best policy. The EU scheme for 2013-2020 is discussed, using cement as a case study.
cap and trade output based allocation subsidization of capacity climate policy carbon leakage competitiveness