Problematic Permitting

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Science  11 Apr 2014:
Vol. 344, Issue 6180, pp. 129-131
DOI: 10.1126/science.344.6180.129-d

When faced with environmental regulations and the costs they impose, companies may relocate to a less-regulated jurisdiction, taking with them jobs and contributing to “leakage” in which targets of regulation, such as carbon emissions, are not reduced, just redistributed. To retain companies, jurisdictions often include exemptions and other incentives in their regulations. Yet these incentives may be seen as taxpayer-funded “handouts” to industry, threatening political support. Thus, the balance is critical. Martin et al. studied the European Union (EU) Emissions Trading Scheme (ETS), which offered emissions permits for free, rather than auctioning them, to many companies deemed at risk of relocating. They interviewed managers of 761 manufacturing firms across six EU countries, and combined this with economic performance data and official ETS carbon emissions data. They found that reductions in the risk of relocation under the ETS permit allocation rules could have been achieved with far fewer free permits. The mismatch was especially problematic in terms of reducing the risk of job loss. Although their initial analyses drew on information gleaned from interviews with companies, the authors developed permit allocation schemes that drew on more easily accessible information, such as firm-level employment and carbon emissions, that were still more effective in terms of minimizing leakage and job loss. Such optimization is critical as ETS considers revising its permitting process, and more emissions trading markets worldwide adopt similar exemption rules.

Am. Econ. Rev., (2014).

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