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GTAP Resource #2432

"When Revenue Recycling Isn’t Enough: Permit Allocation Strategies to Minimize Intra- and International Emissions Leakage "
by Fischer, Carolyn and Alan Fox

Among US policy makers, an important criticism of the Kyoto Protocol is the lack of binding emissions targets for major emitters among developing countries. Energy-intensive industries worry that a policy (like a cap-and-trade program for CO2) that levies a price on domestic emissions alone will distort the playing field with their competitors in nonparticipating countries.

This paper analyzes tradeoffs in choosing different emissions permit allocation mechanisms in order to achieve overall emissions reductions goals while minimizing intra- and international leakage and minimizing the traditional measures of welfare loss associated with emissions reductions. It expands on the preceding literature in two important ways. First, it allows for leakage among domestic sectors, by dividing the economy into sectors that are more likely to be covered under an emissions trading program and those that would remain uncovered. Second, it assumes the policy goal is to meet a net emissions constraint--that is, to ensure true reductions, net of leakage-rather than a simply domestic emissions constraint.

The analysis is carried out in a modified GTAP framework augmented with a labor-leisure choice to allow for the consideration of how distortionary tax instruments may be offset by revenues generated from permit auctions or may be exacerbated by policies that raise prices.

Our results indicate that output-based allocation of emissions permits to the covered sector can dominate auctioned permits in terms of generating higher welfare, even allowing for pre-existing tax distortions. we find that OBA based on value-added shares cost slightly less in welfare terms than auctioning with revenue recycling, while OBA with sector-level distributions based on historical emissions shares cost more, despite its previous promise in terms of reducing leakage. Grandfathered permits generated the highest welfare costs of the policies reaching the net emissions target.

Resource Details (Export Citation) GTAP Keywords
Category: 2007 Conference Paper
Status: Published
By/In: Presented at the 10th Annual Conference on Global Economic Analysis, Purdue University, USA
Date: 2007
Version: 2
Created: Fox, A. (4/17/2007)
Updated: Batta, G. (4/18/2007)
Visits: 2,429
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