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Incentives and quota prices in an emission trading scheme with updating

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  • Knut Einar Rosendahl

    ()
    (Statistics Norway)

Abstract

Emission trading schemes where allocations are based on updated baseline emissions give firms less incentives to reduce emissions. Nevertheless, according to Böhringer and Lange (2005a), such allocation schemes are cost-effective if the system is closed and allocation rules are equal across firms. In this paper we show that the cost-effective solution may be infeasible if the marginal abatement costs grow too fast. Moreover, if a price cap or banking/borrowing are introduced, the abatement profile is no longer the same as in the case with lump sum allocation. In addition, we show that with allocation based on updated emissions, the quota price will always exceed the marginal abatement costs. Numerical simulations indicate that the quota price most likely will be several times higher than the marginal abatement costs, unless a significant share of allowances are either auctioned or lump sum distributed.

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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 495.

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Date of creation: Feb 2007
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Handle: RePEc:ssb:dispap:495

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Keywords: Emission trading; Allocation of quotas; Quota prices.;

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References

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  1. Palmer, Karen & Burtraw, Dallas, 2005. "Cost-effectiveness of renewable electricity policies," Energy Economics, Elsevier, vol. 27(6), pages 873-894, November.
  2. Ian W. H. Parry & Roberton C. Williams III & Lawrence H. Goulder, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," NBER Working Papers 5967, National Bureau of Economic Research, Inc.
  3. Lawrence H. Goulder & Ian W. H. Parry & Roberton C. Williams III & Dallas Burtraw, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," NBER Working Papers 6464, National Bureau of Economic Research, Inc.
  4. Kuik, Onno & Mulder, Machiel, 2004. "Emissions trading and competitiveness: pros and cons of relative and absolute schemes," Energy Policy, Elsevier, vol. 32(6), pages 737-745, April.
  5. Burtraw, Dallas & Palmer, Karen & Kahn, Daniel, 2005. "Allocation of CO2 Emissions Allowances in the Regional Greenhouse Gas Cap-and-Trade Program," Discussion Papers dp-05-25, Resources For the Future.
  6. Burtraw, Dallas & Kahn, Danny & Palmer, Karen, 2006. "CO2 Allowance Allocation in the Regional Greenhouse Gas Initiative and the Effect on Electricity Investors," The Electricity Journal, Elsevier, vol. 19(2), pages 79-90, March.
  7. Löschel, Andreas & Lange, Andreas & Hoffmann, Tim & Böhringer, Christoph & Moslener, Ulf, 2004. "Assessing Emission Allocation in Europe: An Interactive Simulation Approach," ZEW Discussion Papers 04-40, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  8. Considine, Timothy J. & Larson, Donald F., 2004. "The environment as a factor of production," Policy Research Working Paper Series 3271, The World Bank.
  9. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
  10. Christoph Böhringer & Andreas Lange, 2005. "Economic Implications of Alternative Allocation Schemes for Emission Allowances," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(3), pages 563-581, 09.
  11. Jensen, Jesper & Rasmussen, Tobias N., 2000. "Allocation of CO2 Emissions Permits: A General Equilibrium Analysis of Policy Instruments," Journal of Environmental Economics and Management, Elsevier, vol. 40(2), pages 111-136, September.
  12. Fischer, Carolyn, 2001. "Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards," Discussion Papers dp-01-22, Resources For the Future.
  13. Maestad, Ottar, 2007. "Allocation of emission permits with leakage through capital markets," Resource and Energy Economics, Elsevier, vol. 29(1), pages 40-57, January.
  14. Christoph Bohringer & Tim Hoffmann & Andreas Lange & Andreas Loschel & Ulf Moslener, 2005. "Assessing Emission Regulation in Europe: An Interactive Simulation Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-22.
  15. Ahman, Markus & Burtraw, Dallas & Kruger, Joseph & Zetterberg, Lars, 2007. "A Ten-Year Rule to guide the allocation of EU emission allowances," Energy Policy, Elsevier, vol. 35(3), pages 1718-1730, March.
  16. Keats, K. Martinez & Neuhoff, K., 2004. "Allocation of Carbon Emission Certificates in the Power Sector: How generators profit from grandfathered rights," Cambridge Working Papers in Economics 0444, Faculty of Economics, University of Cambridge.
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Cited by:
  1. Dallas Burtraw & Karen Palmer, 2008. "Compensation rules for climate policy in the electricity sector," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(4), pages 819-847.

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