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

Listed author(s):
  • Branger, Frédéric
  • Ponssard, Jean-Pierre
  • Sartor, Oliver
  • Sato, Misato

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.

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File URL: http://eprints.lse.ac.uk/63354/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 63354.

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Date of creation: Sep 2015
Publication status: Published in Journal of the Association of Environmental and Resource Economists, September, 2015, 2(3), pp. 401-437. ISSN: 2333-5955
Handle: RePEc:ehl:lserod:63354
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  1. Karsten Neuhoff & Kim Keats Martinez & Misato Sato, 2006. "Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector," Climate Policy, Taylor & Francis Journals, vol. 6(1), pages 73-91, January.
  2. Laing, Timothy & Sato, Misato & Grubb, Michael & Comberti, Claudia, 2014. "The effects and side-effects of the EU emissions trading scheme," LSE Research Online Documents on Economics 56790, London School of Economics and Political Science, LSE Library.
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  12. Arjaliès , Diane-Laure & Goubet , Cécile & Ponssard , Jean Pierre, 2013. "Strategic Approaches of CO2 Emissions: The Cases of the Cement Industry and Chemical Industry," Les Cahiers de Recherche 994, HEC Paris.
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