Laure B. PREUX
Ulrich J. WAGNER
The 2015 Erik Kempe Award has been awarded to Ralf MARTIN, Mirabelle MUÛLS, Laure B. DE PREUX, and Ulrich J. WAGNER for their paper:
“Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme. Published in the American Economic Review, 104 (8), 2482-2508, 2014”
The Erik Kempe Lecture 2015 took place at the University of Umea on October 17th.
The Nominating Committee comprised of Thomas Aronsson (chair), Bård Harstad and Anastasios Xepapadeas has awarded this paper for the following motivation:
Emission trading is an important part of today’s climate policy. In part to mitigate industry relocation and carbon leakage, emission permits have been allocated free of charge to carbon intensive firms in the EU ETS. When regulated firms are offered compensation to prevent them from relocating, it is important that this compensation scheme is designed in an efficient way. The Erik Kempe Award 2015 goes to Ralf Martin, Mirabelle Muûls, Laure B. de Preux, and Ulrich J. Wagner for their paper “Industry Compensation Under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme”, where such an efficiency rule for how free permits should be allocated is presented.
This efficiency rule means that most compensation should be offered to those firms where it leads to the largest marginal improvement of the policy maker’s objective function for the compensation system. In turn, this implies that an efficient compensation scheme should equalize the marginal probability to relocate, multiplied with the damage following relocation, among firms. Based on this decision rule, the paper also quantifies the losses implied by current, inefficient practices based on firm-level data. These data are collected in a careful way through interviews with firm managers to determine the likelihood of relocation in response to regulation. The results show that an efficient permit allocation may substantially reduce the relocation risk compared to current practices.
Ralf Martin, Mirabelle Muûls, Laure B. de Preux, and Ulrich J. Wagner receive the Erik Kempe Award for a novel and insightful analysis of how compensation to regulated firms should be designed. The study characterizes such a scheme, uses a recently developed data collection strategy, as well as quantifies the importance of designing the compensation scheme in an efficient way. As such, the study contributes significantly to our understanding of – and the solution to – an important economic problem. Furthermore, the analysis and results are not only of value for the academic community; they are also relevant for policy makers globally in their efforts to design cost-effective climate policy through emission trading.