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The role of auctions and forward markets in the EU

Listed author(s):
  • Ehrhart, Karl-Martin


    (Universitaet Karlsruhe)

  • Hoppe, Christian


    (Universitaet Karlsruhe)

  • Schleich, Joachim

    (Fraunhofer Institute for Systems and Innovations Research, Karlsruhe)

  • Seifert, Stefan

    (Universitaet Karlsruhe, IWM)

An analysis of the available National Allocation Plans for the first period (2005�2007) of the EU emissions trading scheme (EU ETS) implies (i) that the total allocation to installations covered under the EU ETS is fairly generous and (ii) that most, if not all EU Member States ban the transfer of allowances (banking) into the second period (2008�2012). In this paper, we explore efficiency issues associated with such a generous allocation of allowances to the trading sectors and the ban on banking. It is argued that allocation to the trading sectors is higher than implied by a cost-minimisation approach. Moreover, due to the reduced level of flexibility a ban on banking increases overall compliance costs. In addition, results of a simulation game conducted with real company participants and with a student control group suggest that a generous primary allocation in the first phase and a ban on banking also lead to an inefficient choice of abatement measures within periods. New results of additional simulations imply that auctioning off a part of the total quantity of allowances and allowing for forward markets may result in more reliable price signals and more efficient outcomes.

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Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 04-59.

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Length: 20 pages
Date of creation: 03 Dec 2004
Handle: RePEc:xrs:sfbmaa:04-59
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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