Carbon Leakage and Capacity-Based Allocations. Is the EU right?

Guy Meunier (1, 2) , Jean-Pierre Ponssard (1) , Philippe Quirion (3)

1 X-DEP-ECO - Département d'Économie de l'École Polytechnique
2 ALISS - Alimentation et sciences sociales
3 CIRED - centre international de recherche sur l'environnement et le développement

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.

Mots clés: cap and trade; output based allocation; subsidization of capacity; climate policy; carbon leakage; competitiveness.

Domaines: Gestion et management; Economies et finances

Guy Meunier, Jean-Pierre Ponssard, Philippe Quirion. Carbon Leakage and Capacity-Based Allocations. Is the EU right?. 2012. ⟨hal-00672907v2⟩