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New entrant allocation in the Nordic energy sectors: incentives and options in the EU ETS

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  • Markus Åhman
  • Kristina Holmgren

Abstract

In the EU emission trading scheme (EU ETS), the treatment of new entrants has proved to be one of the most contentious issues. This article analyses the impact of allocation to new entrants in the energy sector, and identifies options for improved regulation in this field. The point of departure for the discussion is a comparative analysis of the allocation in phase I and phase II of the EU ETS to two hypothetical energy installations located in different EU Member States. The study focuses on the Nordic countries due to their integrated energy market. The quantitative analysis was complemented by interviews with policy-makers and industry representatives. The results suggest that current allocation rules can significantly distort competition. The annual value of the allocation is comparable to the fixed investment costs for a new installation and is not insignificant compared to expected revenues from sales of electricity from the installation. The study finds that the preferred option would be that Nordic countries should not allocate free allowances to new entrants in the energy sector. This should be combined with adjusted rules on allocation to existing installations and closures in order to avoid putting new installations at a disadvantage. A second, less-preferred choice would involve harmonized benchmarks across the Nordic countries.

Suggested Citation

  • Markus Åhman & Kristina Holmgren, 2006. "New entrant allocation in the Nordic energy sectors: incentives and options in the EU ETS," Climate Policy, Taylor & Francis Journals, vol. 6(4), pages 423-440, July.
    • Handle: RePEc:taf:tcpoxx:v:6:y:2006:i:4:p:423-440
    DOI: 10.1080/14693062.2006.9685611
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    References listed on IDEAS

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    1. Sterner, Thomas & Muller, Adrian, 2006. "Output and Abatement Effects of Allocation Readjustment in Permit Trade," RFF Working Paper Series dp-06-49, Resources for the Future.
    2. Fischer, Carolyn, 2001. "Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards," RFF Working Paper Series dp-01-22, Resources for the Future.
    3. Gagelmann, Frank, 2006. "Innovation effects of tradable emission allowance schemes: the treatment of new entrants and shutdowns," UFZ Discussion Papers 4/2006, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
    4. Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2001. "The Effect of Allowance Allocation on the Cost of Carbon Emission Trading," RFF Working Paper Series dp-01-30-, Resources for the Future.
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    Cited by:

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    4. Ahn, Jaekyun, 2014. "Assessment of initial emission allowance allocation methods in the Korean electricity market," Energy Economics, Elsevier, vol. 43(C), pages 244-255.

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