Distribution of Emissions Allowances and the Use of Auction Revenues in the European Union Emissions Trading System

The European Union (EU) Emissions Trading System (ETS) introduced emissions allowances as a new asset worth tens of billions of euros. This article examines how this asset value has entered the economy and been distributed among stakeholders and for various purposes. We show that the system design has evolved significantly with the broader use of auctioning, although there continues to be free allocation of allowances to industry to address emissions leakage. By 2017–2020, more than half of all allowances are intended for auction, but recent reforms will reduce allowances in circulation by delaying, and to some extent canceling, the issuance of some allowances slated for auction. To date, the low price path deviates from what economic theory would prescribe as an efficient path to long-term emissions reduction goals, posing an important challenge for the ETS and coordination of member states’ ambitions. Allowance prices are expected to rise due to recent reforms; however, technology support policies promoting renewable energy and energy efficiency tend to reduce allowance prices. Thus both auctioned quantities and prices remain uncertain. The use of auction revenue is left to EU member states, who have directed more than half of auction revenue to energy- and climate-related activities.