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The Ten-Year Rule: Allocation of Emission Allowances in the EU Emission Trading System

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Author Info

  • Burtraw, Dallas

    ()
    (Resources for the Future)

  • Kruger, Joseph
  • Zetterberg, Lars
  • Åhman, Markus

Abstract

In its guidance on National Allocation Plans (NAPs), the European Commission has discouraged Member States from adopting allocation methodologies that would provide incentives to firms affecting their compliance behavior. The purpose is to promote economic efficiency and to prevent strategic behavior that deviates from individual and collective cost-minimization. For example, some methodologies would reward one type of compliance investment over another. To discourage such actions, the EU Emission Trading System guidelines prohibit ex post redistribution of emission allowances within an allocation period based on behavior in that period. Similarly, the Commission has indicated that decisions about the initial distribution of allowances in the second phase (2008-2012) must depend on measures prior to 2005 so as not to give companies an incentive to adjust their behavior to receive a larger allowance allocation. However, two other aspects of the NAPs—the treatment of closures and new entrants—may also affect firm behavior. An undercurrent in these guidelines is the question of whether Member States should allow incumbent emitters to hold infinitely lived, once-and-for-all property rights to a share of the emission allowances in the future. This paper develops an approach for balancing efficiency considerations with perceived issues of fairness. We propose a ten-year rule to guide policy regarding closure of existing sources and the status of new sources and to guide the initial distribution of emission allowances in general. A ten-year rule would address issues of fairness and capture an important part of the potential gains that could be achieved through an efficient initial distribution of allowances.

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Bibliographic Info

Paper provided by Resources For the Future in its series Discussion Papers with number dp-05-30.

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Date of creation: 27 Jun 2005
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Handle: RePEc:rff:dpaper:dp-05-30

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Related research

Keywords: emission trading; allowance allocations; closures; new entrants; tradable permits; air pollution; cost-effectiveness; greenhouse gases; climate change; global warming; carbon dioxide;

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References

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  1. A. Lans Bovenberg & Lawrence H. Goulder, 2001. "Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does It Cost?," NBER Chapters, in: Behavioral and Distributional Effects of Environmental Policy, pages 45-90 National Bureau of Economic Research, Inc.
  2. Catherine Boemare & Philippe Quirion, 2002. "Implementing greenhouse gas trading in Europe: lessons from economic literature and international experiences," Post-Print halshs-00007264, HAL.
  3. Goulder, Lawrence H. & Parry, Ian W. H. & Williams III, Roberton C. & Burtraw, Dallas, 1999. "The cost-effectiveness of alternative instruments for environmental protection in a second-best setting," Journal of Public Economics, Elsevier, vol. 72(3), pages 329-360, June.
  4. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2002. "The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances," The Electricity Journal, Elsevier, vol. 15(5), pages 51-62, June.
  5. Stavins, Robert, 2005. "Vintage-Differentiated Environmental Regulation," Working Paper Series rwp05-065, Harvard University, John F. Kennedy School of Government.
  6. Carlo Carraro & Gilbert E. Metcalf, 2000. "Behavioral and Distributional Effects of Environmental Policy: Introduction," Discussion Papers Series, Department of Economics, Tufts University 0011, Department of Economics, Tufts University.
  7. Peter Cramton & Suzi Kerr, 2002. "Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather," Papers of Peter Cramton 02eptc, University of Maryland, Department of Economics - Peter Cramton, revised 06 May 2002.
  8. Christoph Böhringer & Andreas Lange, 2005. "Mission Impossible !? On the Harmonization of National Allocation Plans under the EU Emissions Trading Directive," Journal of Regulatory Economics, Springer, vol. 27(1), pages 81-94, September.
  9. repec:reg:rpubli:190 is not listed on IDEAS
  10. Pizer, William & Kruger, Joseph, 2004. "The EU Emissions Trading Directive: Opportunities and Potential Pitfalls," Discussion Papers dp-04-24, Resources For the Future.
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Citations

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Cited by:
  1. Andrew Keeler, 2007. "State greenhouse gas reduction policies: a move in the right direction?," Policy Sciences, Springer, vol. 40(4), pages 353-365, December.
  2. Sandoff, Anders & Schaad, Gabriela, 2009. "Does EU ETS lead to emission reductions through trade? The case of the Swedish emissions trading sector participants," Energy Policy, Elsevier, vol. 37(10), pages 3967-3977, October.
  3. Philippe Quirion & Damien Demailly, 2008. "Changing the Allocation Rules in the EU ETS: Impact on Competitiveness and Economic Efficiency," Working Papers 2008.89, Fondazione Eni Enrico Mattei.

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