The Discussion Papers series presents results from ongoing research projects and other research and analysis by SSB staff, intended for international journals or books. The views and conclusions in this document are those of the author(s).
In the EU emission trading system, these industries are also subjected to higher cost of electricity due to emission pricing in this sector. As a result, the industries in the EU receive free emission allowances to mitigate carbon leakage as well as CO2 compensation due to higher electricity cost. This paper examines the welfare effects of supplementing free allowances with a CO2 compensation on the power-intensive and trade-exposed goods. The analytical results suggest that introducing CO2 compensation has a regional and global welfare improving effect under certain plausible conditions. Numerical simulations in the context of the EU ETS support the analytical findings if the emission reduction target is stringent enough.