Public interest versus interest groups: a political economy analysis of allowance allocation under the EU emissions trading scheme

In a theoretical analysis, we use a common agency model to show that lobbying by energy-intensive sectors covered under an emissions trading scheme (ETS) shifts the regulatory burden of an economy-wide emission constraint to sectors outside the ETS. The emission tax on the latter becomes inefficiently high such that lobbying does not only induce burden shifting but also efficiency losses. A complementary empirical analysis for a cross section of German firms under the EU emissions trading scheme supports our theoretical result on the role of lobbying on allowance allocation.