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How emission certificate allocations distort fossil investments: The German example

Author

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  • Pahle, Michael
  • Fan, Lin
  • Schill, Wolf-Peter

Abstract

Despite political activities to foster a low-carbon energy transition, Germany currently sees a considerable number of new coal power plants being added to its power mix. There are several possible drivers for this "dash for coal", but it is widely accepted that windfall profits gained through free allocation of ETS certificates play an important role. Yet the quantification of allocation-related investment distortions has been limited to back-of-the envelope calculations and stylized models so far. We close this gap with a numerical model integrating both Germany's particular allocation rules and its specific power generation structure. We find that technology specific new entrant provisions have substantially increased incentives to invest in hard coal plants red to natural gas at the time of the ETS onset. More precisely, disproportionate windfall profits compared more than half the total capital costs of a hard coal plant. Moreover, shorter periods of free allocations would not have turned investors' favours towards the cleaner natural gas technology because of pre-existing economic advantages for coal. In contrast, full auctioning of permits or a single best available technology benchmark would have made natural gas the predominant technology of choice.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:enepol:v:39:y:2011:i:4:p:1975-1987
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    Citations

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    Cited by:

    1. Stephen Lecourt & Clément Pallière & Oliver Sartor, 2013. "The impact of emissions-performance benchmarking on free allocations in EU ETS Phase 3," RSCAS Working Papers 2013/17, European University Institute.
    2. Christoph Weber & Philip Vogel, 2014. "Contingent certificate allocation rules and incentives for power plant investment and disinvestment," Journal of Regulatory Economics, Springer, vol. 46(3), pages 292-317, December.
    3. Stephen Lecourt & Clement Palliere & Oliver Sartor, 2013. "Free allocations in EU ETS Phase 3: The impact of emissions-performance benchmarking for carbonintensive industry," Working Papers 1302, Chaire Economie du climat.
    4. Oliver Sartor, 2012. "Carbon Leakage in the Primary Aluminium Sector," Working Papers hal-00776451, HAL.
    5. 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, vol. 2(3), pages 401-437.
    6. Falbo, Paolo & Felletti, Daniele & Stefani, Silvana, 2013. "Free EUAs and fuel switching," Energy Economics, Elsevier, vol. 35(C), pages 14-21.
    7. Xiong, Ling & Shen, Bo & Qi, Shaozhou & Price, Lynn & Ye, Bin, 2017. "The allowance mechanism of China’s carbon trading pilots: A comparative analysis with schemes in EU and California," Applied Energy, Elsevier, vol. 185(P2), pages 1849-1859.
    8. Germeshausen, Robert, 2018. "The European Union emissions trading scheme and fuel efficiency of fossil fuel power plants in Germany," ZEW Discussion Papers 18-007, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    9. repec:bla:jcmkts:v:55:y:2017:i:3:p:432-448 is not listed on IDEAS
    10. Frédéric Branger & Jean-Pierre Ponssard & Oliver Sartor & Misato Sato, 2014. "EU ETS, Free Allocations and Activity Level Thresholds. The devil lies in the details," Working Papers hal-01072736, HAL.

    More about this item

    Keywords

    Electricity sector investments Windfall profits ETS allocations;

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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