Assessing Emission Allocation in Europe: An Interactive Simulation Approach

01/2004; DOI: 10.2139/ssrn.560881
Source: RePEc

ABSTRACT Implementation of an EU-wide emissions trading system by means of National Allocation Plans is at the core of European environmental policy agenda. Member States are faced with the problem of allocating their national emission budgets under the EU Burden Sharing Agreement between energy-intensive sectors that are eligible for international emissions trading and the remaining segments of their economies that will be subject to complementary domestic emission regulation. The country-specific segmentation of national emission budgets between trading sectors and non-trading sectors will determine the cost efficiency of the EU emissions trading system and the gains for each Member State vis-?-vis domestic abatement policies. We present an interactive simulation model where users can specify the design of National Allocation Plans for each EU Member State and then evaluate the induced economic effects. Our numerical framework is based on marginal abatement cost curves for (emissions) trading and non-trading sectors of the EU-15 economies. Illustrative simulations highlight the importance of a coordinated design of National Allocation Plans in order to avoid substantial excess costs of regulation and drastic burden shifting between nontrading and trading sectors.

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    ABSTRACT: We analyse the rules provided in the National Allocation Plans of the EU Member States (MS) for the first period (2005-2007) of the EU emission trading system (EU-ETS) with respect to their impact on energy efficiency and inno-vation and on technology variety. The allocation rules con-sidered 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 in-formation about future allocation. Since the overall allocation appears rather generous, al-lowance prices are expected to be low, in particular since al-most all MS prohibit banking into the second period. Thus, price-induced innovation effects will be weak. Similarly, the auction shares are too small to have any innovation effects. Closures result in a stop of further allocation, providing dis-incentives for innovation. In several MS these disincentives are softened because allowances may be transferred to new installations. However, new entrants typically receive allow-ances for free based on specific emissions and projected out-put. These specific values are either based on benchmarks for homogenous product groups or depend on best available technologies. In some countries a plethora of benchmarks within the same product categories threaten to thwart the flexibility provisions of the EU-ETS. Finally, future alloca-tion rules are vastly unknown, amplifying the uncertainty about the benefits of new investments. In conclusion, exist-ing allocation rules provide only modest incentives for inno-vation.
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    ABSTRACT: In 2005, the EU introduced an emissions trading system in order to pursue its Kyoto obligations. This instrument gives emitters the flexibility to undertake reduction measures in the most cost-efficient way and mobilizes market forces for the protection of the earth's climate. In this paper, we analyse the effects of emissions trading in Europe, especially the value of the flexibility gained by trading compared to fixed quotas. The analysis will be undertaken with a modified version of the GTAP-E model using the latest GTAP data base. It is based on the national allocation plans as submitted to and in most cases approved by the EU.
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    ABSTRACT: The EU ETS opens up for strategic partitioning of emissions allowances by the Member States. In this paper we examine the potential effects of such strategic behavior on quota prices and abatement costs. We show that although marginal abatement costs in the sectors outside the EU ETS become quite differentiated, the effects on the quota price and total abatement costs are small. More abatement, however, takes place in the old Member States that are importers of allowances, compared to the cost-effective outcome. Single countries can nevertheless significantly affect the outcome of the EU ETS by exploiting their market power.

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