Windfall gains

The example of Japan, in the recent past, is one of a country that has suffered from unexpected disinflation and now deflation. This has resulted in an unanticipated real wealth transfer from issuers of nominal bonds to investors, resulting in a windfall loss to the government and windfall gains for investors. Had it issued inflation-linked JGBs, this would have tempered the escalation in Japan s public debt/GDP ratio a little. The unique economic structures and circumstances might not make Japan a particularly persuasive comparison to apply to other economies, the intention is simply to illustrate the risks of the unexpected. 

Here, the key point is that free allocation under the current regime effectively grants a windfall benefit to recipients of allowances, which is not related to the environmental gains that the EU ETS aims to secure this is a good basis for an argument that such aid may be disproportionate. 

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