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Price and welfare effects of emission quota allocation

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We analyze how different ways of allocating emission quotas may influence the electricity market. Using a large-scale numerical model of the Western European energy market, we show that different allocation mechanisms can have very different effects on the electricity market, even if the total emission target is fixed. This is particularly the case if output-based allocation (OBA) of quotas is used, with gas power production substantially higher, partly at the expense of renewable and coal power, than if grandfathering and auctioning based mechanisms are used. The price of emissions is almost twice as high. Moreover, even though electricity prices are lower, the welfare costs of attaining a fixed emission target are significantly higher. The paper analyzes other allocation mechanisms as well, leading to yet more outcomes in the electricity market. The numerical results for OBA are supported by theoretical analysis, with some new general results.

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  • Rolf Golombek & Sverre A.C. Kittelsen & Knut Einar Rosendahl, 2011. "Price and welfare effects of emission quota allocation," Discussion Papers 661, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:661
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    Cited by:

    1. Frédéric Branger & Misato Sato, 2017. "Solving the clinker dilemma with hybrid output-based allocation," Climatic Change, Springer, vol. 140(3), pages 483-501, February.
    2. Meunier, Guy & Ponssard, Jean-Pierre & Quirion, Philippe, 2014. "Carbon leakage and capacity-based allocations: Is the EU right?," Journal of Environmental Economics and Management, Elsevier, vol. 68(2), pages 262-279.
    3. Chang, Kai & Chang, Hao, 2016. "Cutting CO2 intensity targets of interprovincial emissions trading in China," Applied Energy, Elsevier, vol. 163(C), pages 211-221.
    4. Finn Roar Aune, Rolf Golombek , Arild Moe, Knut Einar Rosendahl and Hilde Hallre Le Tissier, 2015. "Liberalizing Russian Gas Markets - An Economic Analysis," The Energy Journal, International Association for Energy Economics, vol. 0(Adelman S).
    5. Rolf Golombek & Kjell Arne Brekke & Michal Kaut & Sverre A.C. Kittelsen & Stein W. Wallace, 2016. "Stochastic equilibrium modeling: The Impact of Uncertainty on the European Energy Market," EcoMod2016 9201, EcoMod.
    6. Brown, David P. & Eckert, Andrew & Eckert, Heather, 2017. "Carbon Pricing with an Output Subsidy under Imperfect Competition: The Case of Alberta's Restructured Electricity Market," Working Papers 2017-1, University of Alberta, Department of Economics.
    7. Zhang, Yue-Jun & Wang, Ao-Dong & Tan, Weiping, 2015. "The impact of China's carbon allowance allocation rules on the product prices and emission reduction behaviors of ETS-covered enterprises," Energy Policy, Elsevier, vol. 86(C), pages 176-185.
    8. Marit E. Klemetsen & Knut Einar Rosendahl & Anja Lund Jakobsen, 2016. "The impacts of the EU ETS on Norwegian plants' environmental and economic performance," Discussion Papers 833, Statistics Norway, Research Department.
    9. Steven A. Gabriel & Arild Moe & Knut Einar Rosendahl & Marina Tsygankova, 2013. "The likelihood and potential implications of a natural gas cartel," Chapters,in: Handbook on Energy and Climate Change, chapter 3, pages 86-102 Edward Elgar Publishing.
    10. Chang, Kai & Zhang, Chao & Chang, Hao, 2016. "Emissions reduction allocation and economic welfare estimation through interregional emissions trading in China: Evidence from efficiency and equity," Energy, Elsevier, vol. 113(C), pages 1125-1135.
    11. Xiong, Ling & Shen, Bo & Qi, Shaozhou & Price, Lynn & Ye, Bin, 2017. "The allowance mechanism of China’s carbon trading pilots: A comparative analysis with schemes in EU and California," Applied Energy, Elsevier, vol. 185(P2), pages 1849-1859.

    More about this item

    Keywords

    Quota market; Electricity market; Allocation of quotas;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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