Emissions Trading and Profit-Neutral Grandfathering
Cameron Hepburn, John Quah, Robert Ritz
Abstract
This paper examines the amount of grandfathering needed for an emissions trading scheme (ETS) to have a neutral impact on firm profits. We provide a simple formula to calculate profit-neutral grandfathering in a Cournot model with firms of different sizes and a general demand function. Using this formula, we obtain estimates of profit-neutral grandfathering for the electricity, cement, newsprint and steel industries. Under the current EU ETS, firms obtain close to full grandfathering; we show that while this may still leave some firms worse off, others have probably benefitted substantially. We find no evidence that any industry as a whole could be worse off with full grandfathering. We also show that the common presumption that a higher rate of cost pass-through lowers profit-neutral grandfathering is unreliable
Keywords: Emissions Trading, Emissions Permits, Grandfathering Firm Profits, Cost Pass-Through, Market Structure
Date: December 2006 | Reference number(s): 295
Series: Department of Economics Discussion Paper Series
JEL Classifications: D43, H23, Q58