Emissions trading and competitiveness: pros and cons of relative and absolute schemes

Emissions trading is a hot issue. At national as well as supranational levels, proposals for introduction of emissions trading schemes have been made. This paper assesses alternative emissions trading schemes at domestic level: (1) schemes where the total level of emissions is fixed (absolute cap-and-trade), (2) schemes where the allowable level of emissions per firm is related to some firm-specific indicator (relative cap-and-trade), and (3) mixed schemes which combine elements of the above alternatives. We present a quantitative assessment of these alternatives for climate change policy in the Netherlands. It is concluded that while relative cap-and-trade would avoid negative effects on competitiveness, it would not reduce emissions at the lowest costs. Besides, the addition of a trade system to existing relative standards does not result in additional emission reduction; it should be combined with other policy measures, such as energy taxes, in order to realise further reduction. Absolute cap-and-trade leads to efficient emissions reduction, but, implemented at the national level, its overall macroeconomic costs may be significant. The mixed scheme has as drawback that it treats firms unequal, which leads to high administrative costs. We conclude that none of the trading schemes is an advisable instrument for domestic climate policy. © 2003 Elsevier Science Ltd. All rights reserved