Carbon allowance allocation rules under emission intensity regulation: Grandfathering versus benchmarking

Abstract

This paper compares the impacts of grandfathering and benchmarking rules on firms' operating decisions, consumer surplus, and social welfare with different emission intensity limits. The findings suggest that with tight emission intensity limits, grandfathering rules are more effective in controlling carbon emissions and enhancing social welfare. Benchmarking rule with relaxed emission intensity can incentivize firms to increase output, lower product prices, and increase consumer surplus. Under relaxed intensity regulation, grandfathering rule can encourage more potential entrants to participate in the product market, and benchmarking rule can motivate firms to take more outputs, resulting higher consumer surplus and more carbon emissions.

Optimal Green Technology Choice for Firms under an Emission Trading Scheme: End-of-Pipe vs. Cleaner Production

“…The firms with emissions exceeding the quotas are required to purchase emission rights while allowing them to sell the remaining quotas in the carbon market to earn profits [9]. The ETS has been regarded as the most promising tool to reduce greenhouse gas emissions worldwide due to its flexibility, effectiveness, and cost-saving nature [10][11][12][13]. Since the launch of the European Union Emissions Trading Scheme (EU ETS) in 2005, a total of 28 ETS markets or pilots with their characteristics have been established all over the world [14].…”