Edwards, T. Huw and Hutton, John P. (1999) The allocation of carbon permits in one country: a general equilibrium analysis of the United Kingdom. Working Paper. University of Warwick, Department of Economics, Coventry.

Preview

PDF WRAP_Edwards_twerp540.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader Download (64Kb)

Abstract

As part of the Kyoto agreement on limiting carbon emissions, from 2008 onwards an international market in auctionable carbon permits will be established. This raises the issue of whether trading should be simply between governments or between companies, or in the latter case how such permits should be allocated. Our paper uses the British section of a CGE model of the European energy sectors to evaluate the economics of various methods of allocating permits within a country, as discussed in Lord Marshall’s recent report to the British government. The option of allocation entirely by auction is similar to the setting of a carbon tax, and the recycling of revenues to reduce or offset other economic distortions could produce a potential net benefit to incomes and employment. 'Grandfathering' some of the permits free to large firms, according to their base year carbon emissions, would mean loss of the benefits of recycling auction revenues. This might be exacerbated if it created windfall profits repatriated by foreign shareholders. The third major alternative is to review the allocation regularly, awarding permits to all firms according to a ‘benchmark’ allocation, based on 'best practice' as estimated by outside experts. This would be similar in practice to recycling the revenue as an output subsidy to the industry, though it could be complicated to implement. Such a system could allow much of the potential ‘double dividend’ to be realised, though it might still be preferable to auction permits, with the revenues used to offset taxes across a wider spread of industry.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	G Geography. Anthropology. Recreation > GE Environmental Sciences
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	United Nations Framework Convention on Climate Change (1992). Protocols, etc., 1997 Dec. 11., Carbon offsetting -- Great Britain, Emissions trading -- Great Britain, Carbon dioxide mitigation -- Great Britain
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	June 1999
Number:	No.540
Number of Pages:	36
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
References:	Ballard, C., Shoven, J., and Whalley, J. (1985): ‘General equilibrium computations of the marginal welfare costs of taxes in the United States’. American Economic Review, 75, 128-38. Barker, T. and Koehler, J. (1998): ‘Equity and ecotax reform in the EU: achieving a 10 per cent reduction in CO2 emissions using excise duties’, Fiscal Studies, 19, 4, 375-402. Barrett, S. (1998): ‘Political Economy of the Kyoto Protocol’. Oxford Review of Economic Policy, Vol. 14, issue 4, pp 20-39. Baumol, W.J. and Oates, W.E. (1971): ‘The use of standards and prices for protection of the environment’. Swedish Journal of Economics, Vol. 73 no. 1. Boehringer, C. and Rutherford, T. (1995): ‘Carbon taxes with exemptions in an open economy: a general equilibrium analysis of the German tax initiative’. Mimeo, Institut fuer Energiewirtschaft und Rationelle Energieanwendung, Stuttgart. Boehringer, C., Rutherford, T. and Voss, A. (1998): "Global CO2 emissions and unilateral action: policy implications of induced trade effects" International Journal of Global Energy Issues, 11 (1-4), 1998, pp 18-22. Bovenberg, A.L. and De Moji, R.A. (1994): ‘Environmental Levies and Distortionary Taxes’. The American Economic Review, 1994. Cramton, P. and Kerr, S. (1998): ‘Tradeable Carbon Permit Auctions: How and why to auction not grandfather’. Discussion paper, University of Maryland, USA. Clarke, R. (1993): ‘Energy taxes and subsidies: their implications for Co2 emissions and abatement costs’, International Journal of Environment and Pollution, 3(1-3): 168-78. Clarke, R., Boero, G., and Winters, L.A.(1996): ‘Controlling Greenhouse Gases: a survey of global macroeconomic studies’. Bulletin of Economic Research, 48 (4): 269-308. Edwards, T.H. (1998): ‘Modelling the Effects of Energy Market Distortions on the Costs of Carbon Abatement: Computable general equilibrium and partial equilibrium assessment’. In Fossati, A. and Hutton, J.P.(Eds) ‘Policy Simulations in the European Union’, Routledge, Andover, U.K. Edwards, T.H., and Hutton, J.P. (1998): ‘Adaptation of a standard multi-country general equilibrium model to assess the effects of EU member countries’ energy and environmental policies in an integrated market’. Working Paper n. 7/98, Istituto di Finanza dell’ Universita, Genova, Italy. Edwards, T.H, and Hutton, J.P. (1999): ‘Carbon abatement and its international effects in Europe including effects on other pollutants: a general equilibrium approach’. University of York Economics Discussion Paper 98/26, March 1999. Farrow, S. (1995): ‘The Dual Political-Economy of Taxes and Tradable Permits’, Economics Letters, 1995 Vol. 49, No.2, pp.217-220. Fehr,H., Rosenberg, C., and Wiegard, W. (1995): Welfare Effects of Value-Added Tax Harmonisation in Europe. Springer. Goulder, L.H., Parry, I.W.H. and Burtraw, D. (1996): Revenue-Raising vs. Other Approaches to Environmental Protection: The Critical Significance of Pre-Existing Tax Distortions’. NBER Working Paper No. W5641. June 1996. Klaassen, G. (1996): ‘Acid Rain and Environmental Degradation. The Economics of Emissions Trading’. Edward Elgar, Cheltenham, UK. IIASA reference BK-96-002. ISBN 1-85898-489-0. Marshall, Lord C, (1998): ‘Economic instruments and the business use of energy’. Report to Chancellor of the Exchequer, Nov. 1998, H.M.Treasury, London. Parry, I.W.H., Williams, R.C., and Goulder, L.H. (1997): ‘When can carbon abatement policies increase welfare ? The fundamental role of distorted factor markets’. NBER Working Paper No. W5967. Ruocco, A. (1996): ‘The GAMS-version of the Fehr-Rosenberg-Wiegard (FRW) multi-country CGE model: A user’s manual. Mimeo, Karls-Eberhard-Universitaet, Tuebingen, Germany. Schmalensee, R., Stoker, T.M. and Judson, R.A. (1998): ‘World carbon dioxide emissions: 1950-2050’. Review of Economics and Statistics, LXXX, Feb 1998 no 1. pp 15-27. S.E.O. (1998): ‘Market performance and environmental policy’. Institute for Economic Research, University of Amsterdam. Smith, S. (1998): ‘Environmental and public finance aspects of the taxation of energy’. Oxford Review of Economic Policy, Vol 14. No 4. Tietenberg, T.H. (1990): ‘Economic Instruments for Environmental Regulation’. Oxford Review of Economic Policy, vol 6, 1990, OUP. Tietenberg, T.H. (1999): ‘Tradable Permits and the Control of Air Pollution in the United States’, Mimeo, Colby College, Maine. Paper written for the 10th anniversary jubilee edition of the Zeitschrift Fuer Angewandte Umweltforschung.
URI:	http://wrap.warwick.ac.uk/id/eprint/1635

Request changes to a record

Actions (login required)

View Item