Analysis of the Allocation Approaches of Carbon Emission Allowances

Abstract

In order to promote a green economy, some countries have successively launched carbon markets, encouraging the development of clean energy through certain market mechanisms, and reducing overall social emissions. The introduction of carbon markets and carbon emission allowances may increase the production cost of high-emission entities and thus urges them to reduce their emissions. The allocation of carbon emission allowances affects the market entities greatly that different allocation approaches will lead to the inconsistent directions of market development. In-depth research on the distribution mechanism is studied in this paper. The influence of the Grandfathering approach and the Benchmark approach are analyzed from the perspective of a power producer. These two approaches are based on the historical situation of individuals and the standards of the whole industry, respectively. The history-based approach is more friendly to high-emission producers, but less encouraging in emissions reduction. Comparably, the standards-based approach may be more effective in encouraging a green economy. Based on a simulation platform where both the electricity market and the carbon market are included, this paper compares the above two allocation approaches in detail. The result may give an accurate guide to the producers.