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The "windfall profits 2.0" during the third phase of EU-ETS

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Abstract

The first two phases of the EU-ETS were characterized by a profit increase, which was primarily due to free allowances given through grandfathering. To avoid these windfall profits and to decrease leakage, two major modifications have been implemented for the third phase: electric companies no longer receive free allowances, while energy intensive and trade exposed sectors are granted free allowances that are calculated based on firm production capacity. This paper theoretically shows a new type of profit increase in sectors that are not exposed to international competition. This paper also illustrates the profit increase for the third phase of the EU-ETS and shows that profits in the electricity sector may increase by approximately 2% when free allowances are given to the other sectors.

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  • Jean-Philippe Nicolai & Jorge Zamorano, 2014. "The "windfall profits 2.0" during the third phase of EU-ETS," CER-ETH Economics working paper series 14/189, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    • Handle: RePEc:eth:wpswif:14-189
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    File URL: http://www.cer.ethz.ch/content/dam/ethz/special-interest/mtec/cer-eth/cer-eth-dam/documents/working-papers/WP-14-189.pdf
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    More about this item

    Keywords

    tradable permits; oligopoly markets; output-based allocation; EU-ETS;
    All these keywords.

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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