Abstract
Starting in 2005, the EU will implement a CO2 emissions trading scheme. In this paper we show that the outspoken goals of economic efficiency and free allocation of allowances are incompatible with harmonized allocation rules. In general, the assignment of allowances is endogenous and differs widely across countries, thereby substantiating concerns for implicit state aid and competitive distortions. We discuss potential adjustments to the Directive in order to allow for harmonization, i.e. for identical assignment factors to similar firms located in different EU countries.
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