The merits of non-tradable quotas as a domestic policy instrument to prevent firm closure

Many countries fear that adopting a domestic tradable quota system for greenhouse gases that requires all emitters to pay for their quotas may lead to closures of emissions-intensive industrial companies. The starting point of this paper is that a government, to avoid firm closure, has opted to allocate quotas free of charge to emission-intensive industries. The aim of this paper is to explore to what extent making the free quotas tradable or non-tradable will affect investment in new abatement technology and firm closure. The conclusion is that the expectations about future product prices and the number of quotas distributed free of charge are crucial for the difference in the properties of tradable and non-tradable quotas.