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

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Listed:
  • Fr�d�ric Branger
  • Jean-Pierre Ponssard
  • Oliver Sartor
  • Misato Sato

Abstract

This paper investigates incentives for firms to increase output above the activity level thresholds (ALTs) in order to obtain more free allowances in the EU Emissions Trading Scheme. While ALTs were introduced in order to reduce excess free allocation to low-activity installations, for installations operating below the threshold, the financial gain from increasing output to reach the threshold may outweigh the costs. Using installation level data for 246 clinker plants, we estimate the effect of ALTs on output decisions. The ALTs induced 5.8Mt of excess clinker production in 2012 (4% of total EU output), which corresponds to 5.2Mt of excess CO2 emissions (over 5% of total sector emissions). As intended, ALTs do reduce overallocation (by 6.6million allowances) relative to a scenario without ALTs, but an alternative output based allocation would further reduce overallocation by 39.5million allowances (29% of total cement sector free allocation). Firms responded disproportionately to ALTs in countries with low demand, especially in Spain and Greece. The excess clinker output lead to increased EU clinker and cement exports, production shifting between plants and also an increase in clinker content of cement thus reducing the carbon efficiency of cement production.

Suggested Citation

  • Fr�d�ric Branger & Jean-Pierre Ponssard & Oliver Sartor & Misato Sato, 2014. "EU ETS, free allocations and activity level thresholds, the devil lies in the details," GRI Working Papers 169, Grantham Research Institute on Climate Change and the Environment.
  • Handle: RePEc:lsg:lsgwps:wp169
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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.
    6. Guy Meunier & Juan-Pablo Montero & Jean-Pierre Ponssard, 2017. "Using Output-Based Allocations to Manage Volatility and Leakage in Pollution Markets," CESifo Working Paper Series 6334, CESifo Group Munich.
    7. repec:gam:jeners:v:11:y:2018:i:5:p:1231-:d:145942 is not listed on IDEAS

    More about this item

    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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