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Using benchmarking for the primary allocation of EU allowances - an application to the German power sector

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  • Schleich, Joachim
  • Cremer, Clemens

Abstract

Basing allocation of allowances for existing installations under the EU Emissions Trading Scheme on specific emission values (benchmarks) rather than on historic emissions may have several advantages. Benchmarking may recognize early action, provide higher incentives for replacing old installations and result in fewer distortions in case of updating, facilitate EU-wide harmonization of allocation rules or allow for simplified and more efficient closure rules. Applying an optimization model for the German power sector, we analyze the distributional effects of various allocation regimes across and within different generation technologies. Results illustrate that regimes with a single uniform benchmark for all fuels or with a single benchmark for coal- and lignite-fired plants imply substantial distributional effects. In particular, lignite- and old coal-fired plants would be made worse off. Under a regime with fuel-specific benchmarks for gas, coal, and lignite 50 % of the gas-fired plants and 4 % of the lignite and coal-fired plants would face an allowance deficit of at least 10 %, while primarily modern lignite-fired plants would benefit. Capping the surplus and shortage of allowances would further moderate the distributional effects, but may tarnish incentives for efficiency improvements and recognition of early action.

Suggested Citation

  • Schleich, Joachim & Cremer, Clemens, 2007. "Using benchmarking for the primary allocation of EU allowances - an application to the German power sector," Working Papers "Sustainability and Innovation" S6/2007, Fraunhofer Institute for Systems and Innovation Research (ISI).
  • Handle: RePEc:zbw:fisisi:s62007
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    File URL: https://www.econstor.eu/bitstream/10419/28517/1/570113105.pdf
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    References listed on IDEAS

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    1. Pizer, William & Kruger, Joseph, 2004. "The EU Emissions Trading Directive: Opportunities and Potential Pitfalls," Discussion Papers dp-04-24, Resources For the Future.
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    3. Jos Sijm & Karsten Neuhoff & Yihsu Chen, 2006. "CO 2 cost pass-through and windfall profits in the power sector," Climate Policy, Taylor & Francis Journals, pages 49-72.
    4. Schleich, Joachim & Cremer, Clemens, 2007. "Using benchmarking for the primary allocation of EU allowances - an application to the German power sector," Working Papers "Sustainability and Innovation" S6/2007, Fraunhofer Institute for Systems and Innovation Research (ISI).
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    7. Peterson, Sonja, 2006. "Efficient abatement in separated carbon markets: A theoretical and quantitative analysis of the EU emissions trading scheme," Kiel Working Papers 1271, Kiel Institute for the World Economy (IfW).
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    10. Rogge, Karoline S. & Schleich, Joachim & Betz, Regina, 2006. "An early assessment of national allocation plans for phase 2 of EU emission trading," Working Papers "Sustainability and Innovation" S1/2006, Fraunhofer Institute for Systems and Innovation Research (ISI).
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    Cited by:

    1. Tang, Ling & Shi, Jiarui & Bao, Qin, 2016. "Designing an emissions trading scheme for China with a dynamic computable general equilibrium model," Energy Policy, Elsevier, vol. 97(C), pages 507-520.
    2. Schleich, Joachim & Rogge, Karoline S. & Betz, Regina, 2008. "Incentives for energy efficiency in the EU Emissions Trading Scheme," Working Papers "Sustainability and Innovation" S2/2008, Fraunhofer Institute for Systems and Innovation Research (ISI).
    3. Rogge, Karoline S. & Schleich, Joachim & Betz, Regina, 2006. "An early assessment of national allocation plans for phase 2 of EU emission trading," Working Papers "Sustainability and Innovation" S1/2006, Fraunhofer Institute for Systems and Innovation Research (ISI).
    4. Schleich, Joachim & Betz, Regina & Rogge, Karoline S., 2007. "EU emission trading: better job second time around?," Working Papers "Sustainability and Innovation" S2/2007, Fraunhofer Institute for Systems and Innovation Research (ISI).
    5. Tang, Ling & Wu, Jiaqian & Yu, Lean & Bao, Qin, 2015. "Carbon emissions trading scheme exploration in China: A multi-agent-based model," Energy Policy, Elsevier, vol. 81(C), pages 152-169.
    6. Rogge, Karoline S. & Linden, Christian, 2010. "Cross-country comparison of the replacement incentives of the EU ETS in 2008-12: the case of the power sector," Working Papers "Sustainability and Innovation" S1/2010, Fraunhofer Institute for Systems and Innovation Research (ISI).

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