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New Entrant and Closure Provisions: How do they Distort?

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  • A. Denny Ellerman

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.

Suggested Citation

  • A. Denny Ellerman, 2008. "New Entrant and Closure Provisions: How do they Distort?," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 63-76.
  • Handle: RePEc:aen:journl:cw-sped-a05
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    1. Frédéric Branger & Jean-Pierre Ponssard & Oliver Sartor & Misato Sato, 2015. "EU ETS, Free Allocations, and Activity Level Thresholds: The Devil Lies in the Details," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, pages 401-437.
    2. 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).
    3. Meunier, Guy & Ponssard, Jean-Pierre & Quirion, Philippe, 2014. "Carbon leakage and capacity-based allocations: Is the EU right?," Journal of Environmental Economics and Management, Elsevier, pages 262-279.
    4. 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.
    5. Pahle, Michael & Fan, Lin & Schill, Wolf-Peter, 2011. "How Emission Certificate Allocations Distort Fossil Investments: The German Example," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 1975-1987.
    6. Golombek, Rolf & Kittelsen, Sverre A.C. & Rosendahl, Knut Einar, 2013. "Price and welfare effects of emission quota allocation," Energy Economics, Elsevier, vol. 36(C), pages 568-580.
    7. 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.
    8. Frank Venmans, 2015. "Capital market response to emission allowance prices: a multivariate GARCH approach," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 17(4), pages 577-620, October.
    9. 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.
    10. 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).
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    14. 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).
    15. Rogge, Karoline S. & Schneider, Malte & Hoffmann, Volker H., 2011. "The innovation impact of the EU Emission Trading System -- Findings of company case studies in the German power sector," Ecological Economics, Elsevier, vol. 70(3), pages 513-523, January.
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    17. Sonia Schwartz, 2009. "Comment distribuer les quotas de pollution ?. Une revue de la littérature," Revue d'économie politique, Dalloz, vol. 119(4), pages 535-568.

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