Mirabelle Muûls

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

When regulated firms are offered compensation to prevent them from relocating, efficiency requires that payments be distributed across firms so as to equalize marginal relocation probabilities, weighted by the damage caused by relocation. We formalize this fundamental economic logic and apply it to analyzing compensation rules proposed under the EU Emissions Trading Scheme, where emission permits are allocated free of charge to carbon intensive and trade exposed industries. We show that this practice results in substantial overcompensation for given carbon leakage risk. Efficient permit allocation reduces the aggregate risk of job loss by more than half without increasing aggregate compensation.

The Impact of the European Union Emissions Trading Scheme on Regulated Firms: What Is the Evidence after Ten Years?

This article reviews the recent literature on ex post evaluation of the impacts of the European Union (EU) Emissions Trading Scheme (ETS) on regulated firms in the industrial and power sectors. We summarize the findings from original research papers concerning three broadly defined impacts: carbon dioxide emissions, economic performance and competitiveness, and innovation. We conclude by highlighting gaps in the current literature and suggesting priorities for future research on this landmark policy. ( JEL: Q52, Q54, Q58)

The Impact of the EU ETS on Regulated Firms: What is the Evidence after Nine Years?

This article reviews the recent literature on ex-post evaluation of the impacts of the European Union Emissions Trading Scheme (EU ETS)on regulated firms in the industrial and power sectors. We summarize the findings from original research papers concerning three broadly defined impacts: CO2 emissions, economic performance and competitiveness, and innovation. We conclude by highlighting gaps in the current literature and suggesting priorities for future research on this landmark policy.

Trading Behavior in the EU Emissions Trading Scheme

Based on interviews with 429 manufacturing firms in six European countries, this study explores the rationality of trading behavior in the European Union Emissions Trading Scheme (EU ETS). We find that banking from one year to the next is used by most firms. Equally, a large majority of installations that are part of larger firms, manage permits within their own installation despite having the option to pool within firms. About 30% of firms do not appreciate the market created by the EU ETS; i.e. they do not consider carbon allowances as a financial asset that could provide profit opportunities. Also, the majority of EU ETS participants in our sample does not trade on the EU allowance market. Finally, we show that some firms do not make their allowances available despite possessing an excess supply: on average firms start to sell only if they have an excess supply of around 5,000 allowances. However, the total number of excess allowances held by firms below the trading threshold is rather small, at less than 10% of all excess allowances.

A Swing-State Theory of Trade Protection in the Electoral College

This paper analyzes trade policy determination in the Electoral College in the presence of swing voters. It determines the circumstances under which incumbent politicians have an incentive to build a reputation for protectionism, thus swaying voting decisions and improving their re-election probability. Strategic trade protection is shown to be more likely when protectionist swing voters have a lead over free trade supporters in states with relatively strong electoral competition and in states representing a larger proportion of Electoral College votes. An empirical test using a measure of industrial concentration in swing and decisive U.S. states lends support to the theoretical findings.

A swing state theory of trade protection in the Electoral College

This paper analyzes trade policy determination in the Electoral College in the presence of swing voters. It determines the circumstances under which incumbent politicians have an incentive to build a reputation for protectionism, thus swaying voting decisions and improving their re-election probability. Strategic trade protection is shown to be more likely when protectionist swing voters have a lead over free trade supporters in states with relatively strong electoral competition and in states representing a larger proportion of Electoral College votes. An empirical test using a measure of industrial concentration in swing and decisive U.S. states lends support to the theoretical findings.

A Mathematical Model for Carbon Emissions Markets

We consider a model in which electricity producers operate in a market that is connected to a carbon emissions market. The link between the allowance market and the electricity market is established through the market bid stack, and other related notions. Then, we derive a forward backward stochastic differential equation (FBSDE) to price an allowance in the case of a single trading period. Finally, we extend these ideas to derive the systems of FBSDEs appropriate for pricing an allowance in the case of multiple trading periods.

Numerical Approximation of FBSDEs

This chapter gives an overview of some numerical schemes that can be applied to forward-backward stochastic differential equations (FBSDEs). First, a backward version of the Euler-Maruyama discretisation, that is applicable to decoupled FBSDE, is presented. Then, we present a Markovian iteration scheme that allows for the discretisation and numerical resolution of fully coupled FBSDE. We also present a regression based method that allows one to draw samples from the conditional expectation of a random variable, allowing one to turn the aforementioned discretisations into full numerical schemes. Finally, we review on numerical examples the convergence property of the Markovian iteration scheme.

Introduction to Forward-Backward Stochastic Differential Equations

This Chapter is a self-contained introduction to Forward-Backward Stochastic Differential Equations (FBSDEs). It reviews first the well-posedness of BSDEs in the Lipschitz setting and their link with a class of non-linear Partial Differential Equation (PDE) in the Markovian case. It presents then recent results on the theory of coupled FBSDEs in the setting of Lipschitz coefficients and non-degenerate noise. The Chapter is concluded by a discussion on the case of equations with irregular coefficients and degenerate noise, which are used to model the carbon allowance price in the subsequent chapters.

A Description of the Carbon Markets and Their Role in Climate Change Mitigation

The chapter describes the latest evolutions of international agreements on climate change. The “externality” that emissions of greenhouse gases produce, i.e. the fact that their effect on future generations is not included in the price of economic activities that generate them, can be dealt with through different policies. The Chapter therefore exposes the economic theory of carbon markets as an efficient policy to address this problem. The chapter concludes with an explanation of the way that the European Union has implemented a carbon market since 2005 and how the policy has evolved since. This market is the subject of the subsequent chapters.