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New Entrant and Closure Provisions: How do they Distort?

  • A. Denny Ellerman
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    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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    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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