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. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.540).

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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
Official Date:	June 1999
Dates:	Date Event June 1999 Published
Number:	No.540
Number of Pages:	36
Institution:	University of Warwick
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access (Creative Commons)

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