Abstract
The article assesses the European Directive on CO2 emission quotas using the GEMINI-E3 model. After summarizing the Directive and briefly describing the model, we present and analyze scenarios for different potential allocation rules. While the European quota mechanism creates a single market for eligible firms, it can also cause distortions vis-à-vis other economic sectors in each country. The arrangement does yield a single carbon price for all eligible firms, but a different carbon price for other sectors — with variations from country to country. The resulting excess costs can be significant.
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