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Emission trading is widely considered to be the most effective policy to minimize the overall costs for CO2 abatement. However, the political feasibility of an emission trading scheme may crucially depend on the free initial allocation of emission permits to carbon-intensive industries in order to offset the reduction in profits. This paper aims to analyze these potential profit impacts and the possible compensation to affected generation companies through modeling the Australian National Electricity Market under a potential emission trading scheme. Historical emission-based and historical generation-based allocation approaches are used in this paper to calculate and compare the percentages of carbon permits that should be freely allocated. Two carbon permit price scenarios are used to analyze the sensitivity of the optimal percentage of free allocation to carbon permit price.