Impact of permit allocation schemes on emission allowances and real income in 2050
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What if…the mitigation burden was shared differently? How permit allocation rules matter -----
In a global cap-and-trade system (as assumed in the 450 Core scenario), emission allowances are alloc...
ated to
individual countries. As illustrated in Figure 3.19, determining regional emission allowances could be an effective step
in shifting part of the burden of mitigation costs from developing economies to OECD countries. All the cases
presented here assume that countries can auction their domestically allocated permits, with the revenues redistributed
to households as a lump sum. The international burden sharing regime is thus primarily aimed at distributing costs
among countries, not between individual polluters. Also, it is assumed that full international trading of permits is
allowed. Essentially, this separates the place where mitigation action takes place from where the economic burden
falls. Unless transaction costs are prohibitive, these permit allocation rules are a very powerful mechanism for ensuring
that least-cost options are taken.
The following different permit allocation rules, which all have the same global emission pathway as the 450 Core
scenario, are considered here:
• The 450 Core scenario: assumes a “contraction and convergence” rule, where the allocation of emission
permits across regions is based on a gradual convergence from actual (2010) levels of emissions to equal
emission allowances per capita by 2050 in all countries; this is effectively a transition from a grandfathering
rule to a per-capita rule. Alternative convergence criteria or convergence dates are also conceivable.
• The Grandfathering scenario: assumes that every year countries will receive the same share in global
allowances, based on actual (2010) emissions.
• The Per-capita scenario: assumes that countries will receive a share in global allowances based on the
projected levels of population, i.e. per-capita emission allowances are equal across countries.
• The Global carbon tax scenario: assumes a carbon tax is implemented globally; this is equivalent to a permit
allocation where emission allowances are allocated such that marginal costs are equal across regions, and
so there is no permit trading.
As GDP is a poor indicator of the welfare impacts of policies when large volumes of emission permit trading
occur, these allocation schemes should be compared using equivalent variation in real income.
Globally, the allocation schemes do not matter much for income levels, as they all constrain global emissions at
identical levels (Figure 3.19). Regional differences are quite pronounced, however, largely mimicking the differences in
emission allowances. Under the Per-capita scenario, poor and populated regions like India and developing countries
(rest of the world group or RoW) would become large permit exporters, and the trade in allocations would reduce costs
in these regions. Most OECD countries have the lowest income losses under the Grandfathering scenario. Russia and
China would also be better off in a grandfathering allocation scheme (given their high current emission intensities),
although income losses in these regions would be above global levels in all schemes.
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