Impact of benchmarking allocation on compliance level of carbon emission reduction

Abstract

This study examines the impact of carbon permit allocation rules on compliance within the emission trading scheme (ETS), a critical mechanism for controlling greenhouse gas (GHG) emissions. Specifically, it investigates the effect of the benchmarking (BM) allocation method, which is an output-based allocation, on firm non-compliance compared to grandfathering (GF), which is based on historical emissions. This investigation is based on Korean firm-level emission data from 2015 to 2019. The results indicate that BM increased the likelihood of non-compliance, especially among small and medium-sized entities (SMEs) and public corporations, while large private firms were not affected. These findings emphasize the importance of providing support to SMEs and public corporations to ensure the effective implementation of the BM allocation rule and the reduction of carbon emissions.