Using output-based allocations to manage volatility and leakage in pollution markets
Guy Meunier; Juan-Pablo Montero and Jean-Pierre Ponssard
Documento de Trabajo IE-PUC, N° 489, 2017
Output-based allocations (OBAs) are typically used in emission trading systems (ETS) with a fixed cap to mitigate leakage in sectors at risk. Recent work has shown they may also be welfare enhancing in markets subject to supply and demand shocks by introducing some exibility in the total cap, resulting in a carbon price closer to marginal damage. We extend previous work to simultaneously include both leakage and volatility. We study how OBA permits can be implemented under an overall cap that may change with the level of production in contrast with a design that deducts OBA permits from the overall permit allocation as is the current practice in the EU-ETS and California. We show that introducing OBA permits while keeping the overall cap fixed would only increase price uctuations and induce severe welfare losses to non-OBA sectors.
JEL Classication: D24, L13, H23, L74
Keywords: pollution markets, carbon price volatility, output-based allocations, carbon leakage
Etiquetas: carbon leakage, carbon price volatility, output-based allocations, pollution markets