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The Polluter Profits Principle: A Note on the Grandfathering of CO2 Emissions Rights in Lax-Cap Trading Regimes

Bartek-Lesi, Mária and Pál, Gabriella (2005) The Polluter Profits Principle: A Note on the Grandfathering of CO2 Emissions Rights in Lax-Cap Trading Regimes. Working Paper. Regionális Energiagazdasági Kutatóközpont, Budapest.

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Abstract

Grandfathering is currently the main principle for the initial allocation of tradable CO2 emission rights under the European cap-and-trade scheme. Furthermore, political feasibility often requires non-restrictive emission caps. Grandfathering under lax cap is unjust, biased and brings polluters unintended windfall profits. Still, in any post-Kyoto international CO2 regime, lax caps may be critical in coaxing binding emission targets out of more countries, especially those in the less-developed world. This paper argues that there is a certain quantity of emission rights between the initial and the optimal emissions, the grandfathering of which brings polluters zero windfall profits or zero windfall losses. Our theoretical concept of zero-windfall grandfathering can be used to demonstrate the windfall profits that have emerged at company level during the first EU trading period. It might thus encourage governments to embrace auctioning, and to combine it with grandfathering as a legitimate tool in the initial allocation of emission rights in later trading regimes.

Item Type:Monograph (Working Paper)
Uncontrolled Keywords:cap-and-trade, climate policy, CO2 allowance, emissions trading, initial allocation, windfall profit, tax treshold, pollunter-pays principle
Subjects:Energy economy
ID Code:178
Deposited By: Adam Hoffmann
Deposited On:30 Nov 2010 15:53
Last Modified:03 Jul 2012 00:24

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