Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector
Open accessAbstract
The allowance allocation under the European emission trading schemes differs fundamentally from earlier cap-and-trade programmes, such as SO2 and NOx in the USA. Because of the sequential nature of negotiations of the overall budget, the allocation also has to follow a sequential process. If power generators anticipate that their current behaviour will affect future allowance allocation, then this can distort today's decisions. Furthermore, the national allocation plans (NAPs) contain multiple provisions dealing with existing installations, what happens to their allocation when they close, and allocations to new entrants. We provide a framework to assess the economic incentives and distortions that provisions in NAPs can have on market prices, operation and investment decisions. To this end, we use both analytic models to illustrate the effects of the incentives, and results from numerical simulation runs that estimate the magnitude of impacts from different allocation rules.
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Anticipation is unlikely for emissions given that most Member States allocated free emissions certificates based on historic emissions using some average over a specific period between 1990 and 2002, well in advance of the start of the EU ETS.
“For emissions, anticipation is unlikely given that most Member States allocated free emissions certificates based on historic emissions using some average over a specific period between 1990 and 2002 (Neuhoff et al., 2006), well in advance of the start of the EU ETS.”
From The joint impact of the European Union emissions trading system on carbon emissions and economic performance (2023) · cites this paper as Neuhoff et al., 2006
The absence of observed carbon leakage reinforces the conclusion that output-based free allocation protects against leakage.
“Modeling studies show that output-based free allocation protects against leakage (83), a conclusion reinforced by the absence of observed carbon leakage (84) (Section 2.3).”
From Carbon Leakage, Consumption, and Trade (2022) · cites this paper as [84]
Free allocation involves complex issues and trade-offs around the number and level of benchmarks.
“Moreover, it involves complex issues and trade-offs around the number and level of benchmarks (84).”
From Carbon Leakage, Consumption, and Trade (2022) · cites this paper as [84]
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References 17 · Cited by 246
- Authors
- Neuhoff, K., Martinez, K. K., & Sato, M.
- Affiliations
- University of Cambridge (GB)
- Venue
- Climate Policy
- Publisher
- Informa UK Limited
- Published
- 2006-01
- Volume
- 6
- Issue
- 1
- Pages
- 73-91
- ISSN
- 1469-3062 (ISSN-L)
- 1752-7457
- OpenAlex
- W2093773306
- Cited by
- 246
- References
- 17
- Citations by year
- 2026: 2 · 2025: 3 · 2024: 4 · 2023: 8 · 2022: 11 · 2021: 3 · 2020: 6 · 2019: 5 · 2018: 10 · 2017: 11 · 2016: 8 · 2015: 8 · 2014: 18 · 2013: 10 · 2012: 16
- FWCI
- 48.86
- Type
- journal article
- Language
- en
- Open access
- Locations
- Climate Policy (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Apollo (University of Cambridge) (submittedVersion)
- Apollo
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Climate Change Policy and Economics
- Physical Sciences › Energy › Renewable Energy, Sustainability and the Environment › Renewable energy and sustainable power systems
- Physical Sciences › Engineering › Electrical and Electronic Engineering › Electric Power System Optimization
- Keywords
- EU Emissions Trading System, emission allowance allocation, electric utilities, national allocation plans, emissions trading, incentive distortion, market prices, new entrants, sequential allocation
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