Output-Based Emissions Allowances and the Equity-Efficiency Trade-off

Yazid Dissou

No 0505E, Working Papers from University of Ottawa, Department of Economics

Abstract: Emissions trading with output-based allocation (OBA) of emissions allowances is gaining popularity as a means to address sectoral equity issues related to the use of market-based instruments in pollution control. Using a dynamic general equilibrium framework, this paper assesses the potential equity-efficiency trade-off between OBA and alternative emissions trading systems, with special attention to the heterogeneity among energy-intensive industries. Because abatement is achieved at a higher marginal cost with OBA, it is less efficient than emissions trading systems in which permit revenues are used to reduce payroll taxes. Nonetheless, the implicit output subsidy in OBA improves the distributional outcome of the abatement policy to the benefit of energy-intensive industries as a whole. The simulation results also suggest that energy-intensive industries that do not produce energy would be the main beneficiaries of OBA. In the new carbonconstrained environment, energy intensive industries that produce energy could not benefit significantly from OBA.

Keywords: Emissions allowance; Output-based allocation; Equity-efficiency trade-off; Dynamic general equilibrium (search for similar items in EconPapers)
JEL-codes: D58 Q28 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2005
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Citations: View citations in EconPapers (2)

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