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Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector

Author

Listed:
  • Neuhoff, K.
  • Keats, K.
  • Sato, M.

Abstract

The allowance allocation under the European Emission trading schemes differs fundamentally from earlier cap and trade programs, like SO2 and NOx in the USA. Because of the iterative nature of negotiations of the overall budget, the allocation also has to follow an iterative process. If power generators anticipate that their current behaviour will affect future allowance allocation, then this can distort today’s decisions. Furthermore, the National Allocation Plans (NAPs) contain multiple provisions dealing with existing installations, what happens to allocation when they close, and allocations to new entrants. We provide a framework to assess the economic incentives and distortions that provisions in NAPs can have on market prices, operation and investment decisions. To this end, we use both analytic models to illustrate the incentives effects and results from numerical simulation runs that estimate the magnitude of impacts from different allocation rules.

Suggested Citation

  • Neuhoff, K. & Keats, K. & Sato, M., 2006. "Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector," Cambridge Working Papers in Economics 0642, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0642
    Note: IO
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    File URL: http://www.electricitypolicy.org.uk/pubs/wp/eprg0618.pdf
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    Keywords

    Allowance allocation; Emission trading; Power sector; Economic incentives;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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