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New Entrant and Closure Provisions: How do they Distort?

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  • A. Denny Ellerman
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    Abstract

    Provisions to endow new entrants with free allowances and to require closed facilities to forfeit allowance endowments are ubiquitous in the EU Emissions Trading Scheme, but a new design feature in cap-and-trade systems. This essay seeks to explore, within a comparative statics framework, the effect of these provisions on agent behavior in output and emissions markets assuming profit maximization. The main conclusion is that the principal effect is on capacity. The effect of the resulting over-capacity on output markets is to reduce output price and to increase output. The effect on emissions markets is more ambiguous in that it depends on the emission characteristics of the new capacity, existing capacity, and the capacity not retired, and the distribution of the excess capacity among these categories.

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    Bibliographic Info

    Article provided by International Association for Energy Economics in its journal The Energy Journal.

    Volume (Year): Volume 29 (2008)
    Issue (Month): Special Issue ()
    Pages: 63-76

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    Handle: RePEc:aen:journl:cw-sped-a05

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    Cited by:
    1. Monjon, Stéphanie & Quirion, Philippe, 2011. "Addressing leakage in the EU ETS: Border adjustment or output-based allocation?," Ecological Economics, Elsevier, vol. 70(11), pages 1957-1971, September.
    2. Yoshifumi Konishi & Nori Tarui, 2013. "Intra-Industry Reallocations and Long-run Impacts of Environmental Regulations," Working Papers 201307, University of Hawaii at Manoa, Department of Economics.
    3. Pahle, Michael & Fan, Lin & Schill, Wolf-Peter, 2011. "How emission certificate allocations distort fossil investments: The German example," Energy Policy, Elsevier, vol. 39(4), pages 1975-1987, April.
    4. Clémence Christin & Jean-Philippe Nicolai & Jerome Pouyet, 2013. "Pollution Permits, Imperfect Competition and Abatement Technologies," CER-ETH Economics working paper series 13/186, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    5. Rogge, Karoline S. & Schneider, Malte & Hoffmann, Volker H., 2010. "The innovation impact of EU emission trading: findings of company case studies in the German power sector," Working Papers "Sustainability and Innovation" S2/2010, Fraunhofer Institute for Systems and Innovation Research (ISI).
    6. Christin, Clémence & Nicolaï, Jean-Philippe & Pouyet, Jerome, 2011. "The Role of Abatement Technologies for Allocating Free Allowances," CEPREMAP Working Papers (Docweb) 1109, CEPREMAP.
    7. Evangelina Dardati, 2013. "Pollution Permit Systems and Firm Dynamics: Does the Allocation Scheme Matter?," ILADES-Georgetown University Working Papers inv294, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
    8. Rogge, Karoline S. & Hoffmann, Volker H., 2010. "The impact of the EU ETS on the sectoral innovation system for power generation technologies - Findings for Germany," Energy Policy, Elsevier, vol. 38(12), pages 7639-7652, December.
    9. Sonia Schwartz, 2009. "Comment distribuer les quotas de pollution ?. Une revue de la littérature," Revue d'économie politique, Dalloz, vol. 0(4), pages 535-568.
    10. Rogge, Karoline S. & Hoffmann, Volker H., 2009. "The impact of the EU ETS on the sectoral innovation system for power generation technologies: findings for Germany," Working Papers "Sustainability and Innovation" S2/2009, Fraunhofer Institute for Systems and Innovation Research (ISI).
    11. Rogge, Karoline S. & Linden, Christian, 2010. "Cross-country comparison of the replacement incentives of the EU ETS in 2008-12: the case of the power sector," Working Papers "Sustainability and Innovation" S1/2010, Fraunhofer Institute for Systems and Innovation Research (ISI).

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