The Allocation of Tradeable Emission Permits in the Eu: Distributional and Competitive Issues (original) (raw)

Incentives for energy efficiency and innovation in the European Emission Trading System

We analyse the rules provided in the National Allocation Plans of the EU Member States (MS) for the first period (2005)(2006)(2007) of the EU emission trading system (EU-ETS) with respect to their impact on energy efficiency and innovation and on technology variety. The allocation rules considered are total quantity of allowances allocated, allocation methods (auction versus grandfathering), rules for banking of left-over allowances into the second period (2008-2012), allocation to newcomers and closures of installations, and information about future allocation.

Sectoral and Regional Expansion of Emissions Trading

2011

We consider an international emissions trading scheme with partial sectoral and regional coverage. Sectoral and regional expansion of the trading scheme is beneficial in aggregate, but not necessarily for individual countries. We simulate international CO2 emission quota markets using marginal abatement cost functions and the Copenhagen 2020 climate policy targets for selected countries that strategically allocate emissions in a bid

In or out: efficient inclusion of installations in an emissions trading scheme

Journal of Regulatory Economics, 2010

Regulators around the world are currently considering national emissions trading schemes (ETS) as cost-effective instruments to reduce greenhouse gas emissions. In the process, they are confronted with numerous design issues. The coverage of installations in an ETS is one such issue. While “blanket coverage” that includes all industrial emitters of greenhouse gases in an economy has some intuitive appeal, and seems equitable, it does not take into full account all the costs related to the extent of coverage. This paper shows that an alternative approach of “partial coverage” based on benefit–cost analysis can achieve the same emission reduction outcome at lower social cost. The approach is based on maximizing the benefits from inclusion of installations in an ETS at the same time as taking all relevant transaction costs into account. A broad definition of transaction costs is used, which covers the regulatory costs to the government as well as regulatory costs imposed on covered installations. We find that particularly for relatively modest emissions reduction targets the cost savings of a “partial coverage” compared to “blanket coverage” are significant.

Examining tradeable permits with market power, banking and non-compliance: a finite period model

2011

Our model examines how co-existence of market power and noncompliance affects the efficiency and effectiveness of a cap-and-trade system with banking-borrowing in a finite period model. The dynamic equilibrium analysis here extends the results of the established literature, and we show that the initial allocation of permits to the dominant firm continues to play a significant role in both the cost-efficiency of abatement, as well as effectiveness of the cap-andtrade system. The presence of cheating, however, makes the permit demand of firms more price-elastic compared to a model with no cheating. Moreover, the second-order price sensitivity of the permit demand of the dominant firm plays a critical role in the compliance behavior of the dominant firm. We analyze the relationship between violation of a fringe firm and the dominant firm, illustrating the asymmetrical implications for when the dominant firm is a buyer of permits versus a seller of permits. Since we expect the regulator to reduce initial permit allocations over time, we also examine its impact on non-compliance behavior of the dominant firm.

Tradeable Emission Permits Regulations in the Presence of Imperfectly Competitive Product Markets: Welfare Implications

Environmental & Resource Economics, 1997

In the present paper, we analyse the interaction of a competitive market for emission permits with an oligopolistic product market. It is well known that a competitive permits market achieves the cost minimizing distribution of abatement effort among the polluting firms for a given reduction in emissions. However, when the product market is oligopolistic, it may redistribute production inefficiently among firms. It has been suggested that this inefficiency can outweigh the gains obtained from using emission permits instead of command and control. Although this argument is clearly correct under full information, it is shown in the present paper that it reverses under incomplete information. In particular, it is shown that when tradeable emission permits are specified according to the standard textbook example, they yield higher social welfare than the command and control regulation.

Allowing communities to trade in imperfectly competitive pollution-permit markets

Journal of Regulatory Economics, 2009

Citizens and organizations representing them play an increasingly important role in markets for environmental quality, but much remains to be learned about how their participation affects these markets. We analyze the effects of allowing a community of citizens to trade pollution permits in an imperfectly competitive permit market. Allowing the community to trade directly reveals its preferences, which enhances welfare. However, community participation may also exacerbate distortions due to market power, even though the community itself trades competitively. Including the community in permit distribution may exacerbate market power distortions by affecting a dominant trader's propensity to participate in the permit market. Second, the community's demand/supply for permits may be more inelastic than other traders and worsen distortions due to market power. We illustrate in an example that these negative effects on competition can dominate the positive effect from preference revelation through the market place.

Energy prices and emissions trading: windfall profits from grandfathering?

European Journal of Law and Economics, 2009

The greenhouse gas emissions trading scheme in the European Union primarily uses grandfathering until 2012, which means that polluters get emission rights free of charge based on their historical emissions. Energy consumers accuse energy producers of making windfall profits by incorporating the market value of those free rights into the energy prices. However, we develop a numerical example to illustrate that the reasoning of the producers is correct. We also explain why this market value is only partly passed on to consumers. We consider various measures and conclude that only auctioning the rights after 2012 nullifies the additional profits.

Mission Impossible !? On the Harmonization of National Allocation Plans under the EU Emissions Trading Directive

Journal of Regulatory Economics, 2005

Starting in 2005, the EU will implement a CO2 emissions trading scheme. We show that the outspoken objectives of economic efficiency and free allocation of allowances are incompatible with harmonized allocation rules. The latter would be necessary to avoid unequal changes of the financial positions between identical firms across the EU, thereby distorting competition, i.e. the “level playing field”. We discuss and evaluate potential adjustments to the current prescriptions of the EU emissions trading system in order to achieve harmonization of allowance allocation across EU Member States. The proposed adjustments involve relaxation of either the efficiency objective or the objective of free allowance allocation.