On the design of optimal grandfathering schemes for emission allowances |
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Authors: | Christoph Bö hringer,Andreas Lange |
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Affiliation: | a Centre for European Economic Research (ZEW), P.O. Box 103443, D-68034 Mannheim, Germany b University of Heidelberg, Department of Economics, Heidelberg, Germany c University of Maryland, Department of Agricultural and Resource Economics, College Park, MD, USA |
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Abstract: | This paper derives optimal schemes for the free allocation of emission allowances in a dynamic context. We consider emissions- and output-based allocation rules which allow for updating of the basis of allocation over time and thereby do not rely on historical data only. We show that such dynamic schemes do not necessarily induce inefficient outcomes. In closed trading systems with an absolute cap on emissions, grandfathering schemes which allocate allowances proportionally to past emissions are first-best. However, in open trading systems where allowances can be traded with outsiders, first-best allocation schemes must not depend on firm-specific decisions while second-best schemes correspond to a Ramsey rule of optimal tax differentiation and are generally based on both past emission and output levels. |
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Keywords: | H21 H23 Q28 |
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