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Mar Reguant and A. Denny Ellerman, November 2008

In this paper, we test the Coase theorem in the context of carbon emissions trading. We investigate whether generating firms were influenced in their operational decisions by the initial amount of grandfathered emissions in the trial period of the European Union Emission Trading Scheme (EU-ETS). Theory suggests that under certain assumptions, the initial allocation should not affect production outcomes. We exploit a non-linearity in the allocation rule of CO2 allowances across coal plants in Spain to test for the relevance of the initial allocation to abatement outcomes. The evidence suggests no systematic relationship between the initial endowment and production decisions at the unit level.