EMISSIONS TRADING AND PROFIT-NEUTRALGRANDFATHERING

This paper examines the amount of grandfathering needed for an emissionstrading scheme (ETS) to have a neutral impact on firm profits. Weprovide a simple formula to calculate profit-neutral grandfathering in aCournot model with firms of different sizes and a general demand function.Using this formula, we obtain estimates of profit-neutral grandfatheringfor the electricity, cement, newsprint and steel industries. Underthe current EU ETS, firms obtain close to full grandfathering; we showthat while this may still leave some firms worse off, others have probablybenefitted substantially. We find no evidence that any industry asa whole could be worse off with full grandfathering. We also show thatthe common presumption that a higher rate of cost pass-through lowersprofit-neutral grandfathering is unreliable....