Industry compensation under relocation risk: a firm-level analysis of the EU Emissions Trading Scheme

Produced as part of the Governments, markets and climate change mitigation CCCEP research programme theme

Working Paper 85


When industry compensation is offered to prevent relocation of regulated firms, efficiency requires that payments be distributed across firms so as to equalise marginal relocation probabilities, weighted by the damage caused by relocation.

We formalise this fundamental economic logic and apply it to analyse industry compensation rules proposed under the EU Emissions Trading Scheme, which allocate permits for free to carbon and trade intensive industries.

We estimate that this practice will result in overcompensation in the order of €6.7 billion every year. Efficient allocation would reduce the aggregate risk of job loss by two thirds without increasing aggregate compensation.

Ralf Martin, Mirabelle Muûls, Laure B. de Preux and Ulrich J. Wagner