Allowance Allocation Research Articles

Economic under-determination: industrial competitiveness and free allowances in the European carbon market

ABSTRACT Tackling climate change has provided a key focus for the creation of what the editors of this special issue have termed ‘environmental intangibles.’ This paper focuses on the European Union Emissions Trading System (EUETS), a climate policy that revolves around the issuance and trading of environmental intangibles called emissions allowances. Set up in the mid-2000s, the cap and trade system has experienced many complications. We propose here to explore a particularly contentious issue: the allocation of free allowances. We will see that deciding on allocation rules leads to vivid debates about whether energy-intensive industries in Europe, such as the manufacturing of cement, can remain competitive in the global economy if climate policy is unilaterally enforced. These debates are focused on a phenomenon referred to as the risk of carbon leakage due to loss of competitiveness. Drawing on an empirical enquiry into the workings of policy-making, the paper examines the ways, in which this risk is framed and questioned through lobbying and evidential work. We suggest that the threat to competitiveness posed by the EUETS can neither be established, nor dismissed; a form of under-determination is maintained and carbon leakage as a never-quite-tangible possibility becomes a battleground for protecting European industry over the environment.

How would an emissions trading scheme affect provincial economies in China: Insights from a computable general equilibrium model

This paper analyzes the economic impacts of a national emissions trading scheme in 31 Chinese provinces. The emissions trading system is assumed to accomplish China's emissions reduction targets set under the Paris Climate Agreement. A multi-regional, multi-sectoral, recursive-dynamic computable general equilibrium model is developed for the analysis. The results show that the emissions trading scheme would reduce provincial CO2 emissions by 4%–22% relative to the baseline levels in 2030. It would cause the provincial GDP to change from −4.6% to 1.8% relative to the 2030 baseline levels. The magnitudes of the impacts on provincial economies and CO2 emissions are sensitive to initial emissions allocation rules. Some provinces that face GDP loss under one rule of emissions allocation would experience GDP gains under the other rules, and vice versa. However, emissions-intensive provincial economies—Neimenggu, Ningxia, Shanxi, and Shaanxi—are found to experience higher GDP loss irrespective of the allowance allocation rules. Meanwhile, Fujian, Guangdong, Guangxi, and Liaoning are found to experience higher GDP under all the rules of allowances allocation.

The environmental and economic effects of the carbon emissions trading scheme in China: The role of alternative allowance allocation

This paper examines the impact of China's carbon emission trading scheme (ETS) on carbon emissions reduction and economic performance with a focus on the role of alternative allowance allocation. Using the industry-by-province panel data during the 2008-2016 period, the empirical strategy employs a difference-in-difference-in-difference model. Some novel findings emerge. First, the ETS leads to a reduction in carbon emissions and emission intensity, in particular, for those adopting the benchmarking allowance allocation. Second, the reduction in carbon emissions arises from an increase in energy efficiency. Moreover, the adjustment of energy structure is more favorable to ETS regions adopting the benchmarking allocation rule compared with ETS regions using the grandfathering one. Third, the ETS has muted impacts on employment and returns on assets. A further comparison between the benchmarking and grandfathering rules reveals that the former is associated with a rise in employment, while the latter leads to an increase in returns on assets. In line with the findings, it is recommended that the government should further develop the benchmarking value of the sub-sectors, and gradually transform the allowance allocation methods into the benchmarking-dominated method for China ETS.

Does Carbon Risk Matter? Evidence of Carbon Premium in EU Energy-Intensive Companies

In this paper we have assessed the impact of the European Union’s Emissions Trading Scheme (EU ETS) on the level of the carbon premium. The aim of the study is to determine whether there is a stable carbon premium in energy-intensive sectors. Unlike other studies, our research sample included not only companies in the energy sector, but also entities classified as energy-intensive. In the research, we used our own criterion for allocating companies to a clean and dirty portfolio, which made it possible to make the estimation of the carbon premium more resistant to changes in the rules for allocation of emission allowances. We detected a positive, statistically significant carbon premium in the years 2003–2012 and a negative one in the years 2013–2015, but we did not detect a statistically significant carbon premium in the period 2016–2019. This means that there are no grounds for concluding that there is a stable, positive carbon premium for energy-intensive companies subject to the EU ETS over time. We have also noticed that a significant problem in studying the impact of the EU ETS on the carbon premium is the use of static portfolios of clean and dirty companies

How to design emission trading scheme to promote corporate low-carbon technological innovation: Evidence from China

The appropriate design of the emission trading scheme (ETS) plays a crucial role in promoting companies to conduct low-carbon technological innovations. Based on a questionnaire survey, this paper examines how the design of the ETS and identified determinants have impacted corporate low-carbon technological investment decisions. The data was collected from 99 companies in the eight areas that are implementing the ETS in China. The results indicate that five attributes significantly influence the possibility of corporate investments in low-carbon technologies and thus need more attention in designing the national ETS, including allowance allocation for existing installations, compliance period, allowance allocation for new entrants, allowance banking and policy stability. From the viewpoint of the surveyed companies, the ETS that allocates allowances for existing installations based on the benchmark, has a long compliance period, allocates allowances for new entrants based on a uniform benchmark and allows companies to bank allowances could effectively encourage companies to conduct the low-carbon technological investment. The results of this study are important in light of ongoing discussions and developments of the national ETS in China.

Impact of financing models and carbon allowance allocation rules in a supply chain

This paper focuses on a capital-constrained supply chain system under a carbon trading environment. Bank Credit Financing and Trade Credit Financing models are designed under the grandfathering and benchmarking allocation rules. Through constructing a Stackelberg game model consisting of a supplier and a capital-constrained manufacturer who is investing in carbon emission reduction, we analyze the optimal decisions and financing selection strategies under different allowance allocation rules. These results show that the manufacturer always invests a higher carbon emission reduction under the benchmarking rule. Meanwhile, he always prefers BCF no matter how the carbon allocation rules change. Whereas, the upstream supplier would like to provide delayed payment under TCF. The government is beneficial to provide the benchmarking rule to the manufacturer when his historical carbon emission is lower, otherwise, the government can implement the grandfathering rule.

Emission abatement cost in China with consideration of technological heterogeneity

Marginal emission abatement costs play an important role in the emission trading market and in the allocation of emission reduction allowances. The traditional methods for estimating marginal emission abatement costs do not account for technological heterogeneity, which leads to biased results. To solve this problem, an improved method that combines the clustering method with a parametric output directional distance function is proposed in this paper. This method integrates the economic proximity of each examined province into its assessment of the environmental production technology of the province and takes multiple pollutants (CO2, SO2 and NOX) into consideration. Based on this method, in this paper, the environmental performance of 30 provinces in China from 2006 to 2017 is measured, the marginal emission abatement cost of CO2 is estimated, and a nonlinear programming method is used to study the optimal allocation of emission reduction in China. The results indicate the following: First, categorizing the provinces according to their economic proximity results in groups that differ greatly from geographically based groups. Second, the average inefficiency of these 30 Chinese provinces is 2.551%, which is less than that estimated by the methods that do not consider heterogeneity. Third, China’s average marginal CO2 abatement cost is 797.79 CNY/ton, and it exhibits a growing trend. Finally, compared to the grandfathering rule, the optimal quota allocation proposed by this paper can save approximately 797.793 billion CNY.

Smart hedging against carbon leakage

SUMMARY Policy makers in the EU and elsewhere are concerned that unilateral pricing of the carbon externality induces carbon leakage through relocation of emission-intensive and trade-exposed production to other regions. A common measure to mitigate such leakage is to combine an emission trading system with output-based allocation (OBA) of allowances where the latter works as an implicit production subsidy to regulated industries. We show analytically that it is optimal to impose in addition a consumption tax on the OBA goods (i.e., goods that are entitled to OBA) at a rate which is equivalent in value to the OBA subsidy rate. The explanation is that the consumption tax alleviates excessive consumption of the OBA goods, which is a distortionary effect of introducing OBA. Using a multi-region multi-sector computable general equilibrium model calibrated to empirical data, we quantify the welfare gains for the EU of imposing such a consumption tax on top of its existing emission trading system with OBA. We run Monte Carlo simulations to account for uncertain leakage exposure of goods entitled to OBA. The consumption tax increases welfare whether the goods are highly exposed to leakage or not, and hence can be regarded as smart hedging against carbon leakage.

Coase and Cap-and-Trade: Evidence on the Independence Property from the European Carbon Market

This paper tests the independence property under the Coase Theorem in a large multinational cap-and-trade scheme for greenhouse gas emissions, the EU Emissions Trading System (EU ETS). I analyze whether emissions of power producers regulated under the EU ETS are independent from allowance allocations, leveraging a change in allocation policy for a difference-in-differences strategy. The evidence suggests that the independence property holds overall and for larger emitters. It fails for small emitters, indicating that transaction costs distort their emission decisions. However, due to their small share of aggregate emissions the independence property remains intact at the sector level.

The effect of the EU ETS free allowance allocation on energy mix diversification: the case of Poland’s power sector

ABSTRACT Since 2013, power plants in the EU have been obliged to buy carbon permits instead of receiving them for free. However, in order to ease their energy transition, some Member States that meet certain conditions (mainly a high share of fossil fuels and low income) are allowed to continue to receive free allowances for existing power plants (Article 10c of the EU ETS Directive). In exchange, they must invest in modernizing their electricity sector and diversifying their energy supply. However, up to 70% of the conditional investments have been made in upgrading coal-fired units, which casts doubt on the effectiveness of the measure to increase energy diversification. This paper evaluates the effect that the so-called rule 10c has had on energy diversification. A synthetic control method is applied to aggregate data from Poland, one of the countries eligible for free allowances, to investigate how the lignite and wind share in electricity generation would have evolved had Poland not used the rule 10c derogation. Our results indicate that Poland’s energy diversification would have been the same if allowances had been auctioned instead of allocated for free. Therefore, the policy is only relevant in political terms and involves unjustified revenue loss for affected governments in favour of installations, i.e. subsidies. Our results suggest that rule 10c, as defined, does not incentivize investment in low carbon alternatives. The use of this transitional free allocation will continue to be available in phase IV (2021–2030) of the EU Emission Trading System (EU ETS). Key policy insights Application of the rule 10c derogation under the EU ETS, granting emission allowances for free to fossil fuel-reliant member states, has not achieved the intended goal of energy mix diversification in Poland. Using a synthetic control method, we show that the lignite and wind share of electricity production in Poland would have followed the same trajectory if full auctioning, instead of free allocation, had been applied. Because most conditional investments were used to retrofit coal-fired plants, the policy’s main contribution was to subsidize continued use of coal power. The policy deprived affected governments of auction revenues that could have been used to ease decarbonization.

Going Green by Putting a Price on Pollution: Firm-level Evidence from the EU

This paper shows that, when the price of emission allowances is sufficiently high, emission trading schemes improve the emission efficiency of highly polluting firms. The efficiency gain comes from a relative decrease in emissions rather than a relative increase in operating revenue. Part of the improvement is realized via the acquisition of green firms. The size of the improvement depends on the initial allocation of free emission allowances: highly polluting firms receiving more emission allowances for free, such as firms on the carbon leakage list, have a weaker incentive to become more efficient. For identification, we exploit the tightening in EU ETS regulation in 2017, which led to a steep price increase of emission allowances and made the ETS regulation more binding for polluting firms.

Influence of a pilot carbon trading policy on enterprises’ low-carbon innovation in China

ABSTRACT China’s pilot carbon trading policy is expected to be both efficient and flexible in reducing carbon emissions through incentivising low-carbon innovation. This paper analyses the effects of this pilot policy on low-carbon innovation using a difference-in-difference model, based on a sample of selected enterprises and carrying out a series of robustness tests to corroborate the results. The analysis shows that the pilot carbon trading policy is predicted to have a significantly positive effect on the low-carbon innovation of enterprises that fall under its scope, notably by alleviating obstacles to the financing of low-carbon innovation. Furthermore, a heterogeneity analysis of enterprises’ characteristics and carbon allowance allocation methods in different pilots indicates that the effect of the pilot carbon trading policy on enterprises’ low-carbon innovation will be reflected mainly in enterprises in China’s eastern provinces, and in state-owned enterprises. Compared with the grandfathering and historical intensity allocation methods, the findings of this study suggest that the extent of low-carbon innovation is significantly greater when the benchmarking method is used. The results of this paper offer some key insights into improving the policy design of a nationwide carbon trading market in China, as well as a reference point for other countries and regions, especially developing countries, in establishing a carbon trading market. Key policy insights China’s pilot carbon trading policy can promote low-carbon innovation. Easing the financing constraints of enterprises can promote low-carbon innovation. Compared with the grandfathering and historical intensity allocation methods, using the benchmarking method significantly improves the enterprises’ low-carbon innovation.

Allocation Method for Carbon Emission Initial Allowance in Port Industry

Targeting issues in initial allocation of carbon emission allowance in port industry, this study puts forth a mixed allocation method that uses the baseline method for handling production allowance and the historical intensity method for auxiliary production allowance. This study clarifies the organizational boundary and operational boundary using this method, analyzes related factors, and provides the computational formulas. In the instance analysis, the specific calculation process of applying this method to specialized container terminal, specialized dry bulk terminal and general terminal, as well as the value method of basic data and correlation coefficient are given. Compared with the single use of historical intensity method or baseline method for allocation of allowances, although the operation of the mixed allocation method is relatively complicated, it not only considers the historical emission basis of the emission control enterprises, but also achieves a fairer and more reasonable performance by setting the baseline intensity of the loading and unloading production links. This research will help drive port companies to enter the carbon emissions trading markets as soon as possible, playing a promotive role in catalysing sustainable development of port companies.

Climate Neutral Production, Free Allocation of Allowances under Emissions Trading Systems, and the WTO: How to Secure Compatibility with the ASCM

To reach climate neutrality, carbon emissions from the production of basic materials need to be significantly reduced. For governments’ support measures to be consistent with their World Trade Organization obligations, they need to be compatible with the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM). This paper analyzes the ASCM consistency of three selected support schemes, namely: (1) free allocation under emissions trading systems such as the European Union Emissions Trading System (EU ETS) to operators of installations deemed to be at significant risk of carbon leakage; (2) a combination of a charge on carbon-intensive materials with free allocation; and (3) carbon contracts for differences (CCfDs) for operators of climate-neutral installations, in which governments pay out the incremental costs of climate neutral-production processes relative to the costs of conventional primary material production. The analysis reveals that the current system of carbon leakage protection through free allocation is vulnerable to challenges under the ASCM. By contrast, a transition to a combination of free allocation and a charge on carbon-intensive materials would implement consistent carbon-pricing and thus would very likely not amount to a subsidy under the ASCM. In a similar vein, support for climate-neutral installations through CCfDs could be designed in such a way that it confers no benefit, so that it would also not constitute a subsidy.

국제기후변화법제와 국제통상법체제의 조화적 공존을 위한 법적고찰 : 탄소배출권 무상할당조치와 WTO 보조금협정을 중심으로

2015년 12월 파리협정이 채택됨에 따라 교토의정서 체제를 대체하는 신기후체제가 도입되었다. 이에 따라 탄소배출에 가격을 부여하여 온실가스 배출비용을 부담하도록 하는 소위 탄소가격제(carbon pricing)의 시행이 점차 확대되어 가고 있으며, 여러 국가들은 온실가스 감축을 위한 주요 수단으로서 배출권 거래제의 시행을 확대해가고 있다. 최근 미국의 철강업체들은 유럽 및 한국의 탄소배출권 거래제를 보조금의 측면에서 문제 삼고 있으며, 특히 탄소배출권 무상할당이 상계관세 부과의 대상이 되는 보조금이라고 주장하고 있다. 보조금은 무역 및 경쟁에 왜곡을 초래할 수도 있으나 시장실패 방지 또는 다른 합법적 정책목표를 추구하는데 이용된다는 측면에서 양면적 속성을 지닌다. 그런데 ASCM은 환경정책 측면에 입각한 정당화 가능성을 인정하지 아니하고 협정의 기계적 적용결과에 따라 보조금 여하를 판단하도록 하는 내재적 한계가 있다.BR 탄소배출권 무상할당조치는 각국의 불균형적인 환경규제정책에 따라 발생하는 탄소누출의 문제를 방지하기 위한 주요 수단이다. 보조금 논리에 의해 탄소배출권 무상할당이 불가능하게 된다면 기후변화법제상 의무 준수가 어려워 질 수도 있다. 탄소배출권 무상할당조치를 보조금 협정 규율에 비추어 검토하고, 국제기후변화법제와 국제통상법체제가 조화적으로 공존할 수 있는 방안을 모색하여야 한다.

Border carbon adjustments and industrial competitiveness in a European Green Deal

ABSTRACT As part of the European Green Deal, the EU is considering the introduction of a Border Carbon Adjustment (BCA) on imports as an alternative to free allocation of emission allowances to reduce the risk of carbon leakage under the EU’s Emissions Trading System (EU ETS). While a BCA for exports is not categorically excluded, it is less likely to be consistent with World Trade Organisation rules and therefore less likely to be proposed than an import-only BCA. In this paper, we show that replacing free allocation by an import-only BCA would weaken the competitiveness of EU producers in foreign markets. Free allocation also helps support the cost competitiveness of domestic products that are exported to non-EU markets. Therefore, a move to import-only BCAs does not necessarily make redundant the continued use of free allocation to help safeguard overall industrial competitiveness. While combining an import BCA with free allocation for exports can increase the risk of legal challenges, such risks may be reduced with an appropriate design. More broadly, policymakers need to navigate a complex trade-off between competitiveness support, a stronger carbon price signal, and extra fiscal revenue. Key policy insights A BCA on imports levels the playing field in domestic EU markets but does not provide competitiveness support to exports Therefore, a move to an import-only BCAs does not obviate the need for free allocation to safeguard overall industrial competitiveness While combining an import-only BCA with free allocation for exports increases the risk of legal challenges, such risks may be reduced with an appropriate design

Initial Allocation Model of CO2 Emission Allowances Based on the Equity-Efficiency Tradeoff

Reasonably and fairly allocating carbon intensity reduction targets among Chinese provinces is a key problem in effectively controlling and reducing CO2 emissions. This study establishes the ZSG-DDF model combining the Zero-Sum Gains DEA and the Directional Distance Function to study the CO2 emission allowance allocations from the perspective of maximum efficiency. This model can discriminate desirable and undesirable outputs and solve the problem of total CO2 emission amount control. Then, we add the equity principle to the constraint conditions, namely, the proportion of carbon emission allowance approaching the proportion of GDP. Finally, we establish a CO2 emission allocation scheme based on the equity-efficiency tradeoff while considering the relationship between economic development and carbon emissions as well as achieving maximum efficiency. We use this new model to allocate CO2 emission allowance during the Chinese 13th Five-Year Plan, and compare it with the other two allocation schemes, including National allocations during the 13th Five-Year Plan, allocation scheme from the perspective of efficiency maximization. The results have a certain significance for government departments to formulate the allocation scheme of CO2 emission allowance.

A case study on China's carbon emission trading system: experiences and recommendations

China officially launched seven state pilot ETS programs starting in 2013 and initiated a national ETS in 2017 respectively. The many accumulated experiences from the pilot programs include such findings as the importance of setting realistic targets balancing the needs for carbon reductions with those of economic growth and pollution control and the need for legislation specifying the actions to be taken, provisions for disclosure, allowance allocations, offsets, infrastructure building, monitoring reporting and verification, and adoption of a compliance mechanism. Deficiencies in the pilot programs are evaluated, such as those derived from lack of a national legal basis and unified rules for the carbon market, an excess of free allocation of allowances, a lack of liquidity of the market, lenient punishment for non-compliance, and absence of a sound monitoring and regulatory mechanism. The requisites for sound market-based programs are described, with particular emphasis on the need for a comprehensive legal basis on which programs can be built. The pluses and minuses of cap and trade market-based programs versus carbon taxes are explored in depth, including the possibilities of combining the two systems. Various bottom up and top down approaches are explored and the key elements of success and failure.

The impact of a carbon trading pilot policy on the low-carbon international competitiveness of industry in China: An empirical analysis based on a DDD model

This paper examines the impact of a carbon trading pilot policy on the low-carbon international competitiveness of an industry to test whether creating a carbon market causes the Porter effect. Using a sample of 33 industries in 30 provinces in China from 2009 to 2016 with a difference-in-difference-in-difference model (DDD) and a series of robustness tests, we find evidence of a significant positive influence of a carbon trading pilot policy on the low-carbon international competitiveness of industries covered by the pilot programs. Research on its influencing mechanism reveals that a carbon trading pilot policy promotes the low-carbon international competitiveness of industries by driving low-carbon technological progress. Furthermore, a heterogeneity analysis of industry characteristics and carbon allowance allocation methods in different pilots indicates that the impact of a carbon trading pilot policy on industry low-carbon international competitiveness is reflected mainly in industries with low-carbon emissions, high state-owned capital, and high export intensity. Compared with the grandfather method and the historical intensity method, the low-carbon international competitiveness of an industry is significantly increased when the benchmarking method is used. The results of this paper offer important insights for improving the policy design of a nationwide carbon market, as well as a reference point for other countries and regions, especially developing countries, in establishing a carbon trading market.

Comparative study on power sector allowance allocation among China's Emissions Trading Scheme pilots and its implications for national carbon market

Comparative study on power sector allowance allocation among China's Emissions Trading Scheme pilots and its implications for national carbon market