Climate reform and transitional industry assistance: Windfall profits for polluters?

Abstract

Introducing climate change policies such as carbon pricing can bring substantial costs for fossil-fuel-fired electricity generators, with incumbents often granted a transitional allocation of free emission permits. The free allocation of emission permits and the pass-through of carbon prices to higher electricity prices has created substantial concern that these policies allow emissions-intensive firms to reap windfall profits. We use the implementation and later repeal of Australia’s price on carbon to show that coal-fired plants which received free permits had a substantial increase in their profits. This result supports calls for any transitional climate policy assistance to be tied to projected pass-through rates in order to avoid creating wealth transfers from taxpayers to emission-intensive generator owners.