Abstract
Fear of lowering firms’ competitiveness and carbon leakage is the reason for large amounts of allowances in the European Union’s Emissions Trading System (EU ETS) still being allocated for free. At the same time, unadjusted free allocation of allowances in times of economic recession is partly responsible for the large surplus of allowances that has cumulated in the EU ETS and that is lowering prices in the market. For Phase IV, the introduction of dynamic allocation has been proposed to react to significant changes in production, to prevent the accumulation of further surplus on the one hand and to protect installations from severe underallocation on the other. A reserve of about 400 million allowances is planned for that purpose. This paper analyses the demand for certificates from this reserve under different assumptions on production development as well as different design options for Phase IV. The analysis builds on freely available allocation data from Phase III along with projections of production trends from different time periods in the past. In most of the scenarios, the 400 million allowances are sufficient to fulfil demand for allowances from dynamic allocation until at least the second half of Phase IV (often even for the whole of Phase IV). Even though certain aspects analysed are now not fully compatible with the agreed-upon Phase IV revision, the analysis indicates that the amount of allowances foreseen for dynamic allocation is sufficient for Phase IV. In particular the threshold value of 10% that was introduced in the legislation will ensure that the demand of allowances is likely well below the demand found in the different scenarios in this analysis that neglects this threshold value.
Highlights
For over 10 years, the EU Emissions Trading System (EU ETS) has constituted the key climate policy instrument in the EU
This section presents the results from the different scenarios. It starts with the presentation of the calculated allocation for Phase IV before presenting the demand/supply from the reserve and the conclusions regarding the range of the reserve proposed by the Commission
The analysis presented in this paper addressed the introduction of a dynamic element to free allocation of allowances as proposed by the EU Commission in July 2015 for Phase IV of the European Union’s Emissions Trading System (EU ETS)
Summary
For over 10 years, the EU Emissions Trading System (EU ETS) has constituted the key climate policy instrument in the EU. Building upon the principle of cap and trade, it limits the emission of greenhouse gases—mainly CO2 —in major emitting sectors such as power generation, refineries, and energy-intensive industry, covering around 45% of the EU’s total greenhouse gas emissions. Installations covered by the system are obliged to provide allowances for their annual emissions. To achieve emission reductions at the lowest possible costs, firms are allowed to trade emission allowances—so-called EU allowances “EUAs” with each other. A key issue from the introduction of the instrument until today is the allocation of EUAs to installations. While in the first years of the EU ETS, the majority of allowances were allocated free of charge based on historic emissions (“grandfathering”), the allocation system was changed in Phase
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