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EU ETS, free allocations, and activity level thresholds: the devil lies in the details

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  • Branger, Frédéric
  • Ponssard, Jean-Pierre
  • Sartor, Oliver
  • Sato, Misato

Abstract

It is well known that discontinuous jumps or thresholds in tax or subsidies are socially inefficient, because they create incentives to make strategic behavioural changes that lead to substantial increases in private benefits. This paper investigates these distortions in the context of the EU Emissions Trading Scheme, where activity level thresholds (ALTs) were introduced in Phase 3 to reduce the overallocation of free allowances to low-activity installations. Using installation-level data, we find evidence that cement producers indeed respond to such thresholds when confronted with low demand, by strategically adjusting output to obtain more free allocation. We estimate that in 2012, ALTs induced excess cement clinker production of 6.4 Mt (5% of total EU output), and in affected regions this further distorted trade patterns and reversed carbon intensity improvements. As intended, ALTs reduced free allocation by 4%; however, a linear scheme (output-based allocation) would have achieved a 32% reduction.

Suggested Citation

  • Branger, Frédéric & Ponssard, Jean-Pierre & Sartor, Oliver & Sato, Misato, 2015. "EU ETS, free allocations, and activity level thresholds: the devil lies in the details," LSE Research Online Documents on Economics 63354, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:63354
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    File URL: http://eprints.lse.ac.uk/63354/
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    References listed on IDEAS

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    Cited by:

    1. repec:oup:renvpo:v:11:y:2017:i:2:p:183-206. is not listed on IDEAS
    2. Ian Lange & Peter Maniloff, 2017. "Updating Allowance Allocations in Cap-and-Trade: Evidence from the NOx Budget Program," Working Papers 2017-01, Colorado School of Mines, Division of Economics and Business.
    3. repec:eee:eneeco:v:68:y:2017:i:s1:p:57-65 is not listed on IDEAS
    4. Stefano F. Verde & Christoph Graf & Thijs Jong and Claudio Marcantonini, 2016. "Installation entries and exits in the EU ETS industrial sector," RSCAS Working Papers 2016/19, European University Institute.
    5. Vera Zipperer & Misato Sato & Karsten Neuhoff, 2017. "Benchmarks for Emissions Trading – General Principles for Emissions Scope," Discussion Papers of DIW Berlin 1712, DIW Berlin, German Institute for Economic Research.

    More about this item

    Keywords

    activity level thresholds; carbon trading; cement; EU ETC; free allowance allocation;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics

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