Free Allocation Of Allowances Research Articles

Mission Impossible !? On the Harmonization of National Allocation Plans under the EU Emissions Trading Directive

Starting in 2005, the EU will implement a CO2 emissions trading scheme. We show that the outspoken objectives of economic efficiency and free allocation of allowances are incompatible with harmonized allocation rules. The latter would be necessary to avoid unequal changes of the financial positions between identical firms across the EU, thereby distorting competition, i.e. the “level playing field”. We discuss and evaluate potential adjustments to the current prescriptions of the EU emissions trading system in order to achieve harmonization of allowance allocation across EU Member States. The proposed adjustments involve relaxation of either the efficiency objective or the objective of free allowance allocation.

Mission Impossible!? On the Harmonization of National Allocation Plans under the EU Emissions Trading Directive

Starting in 2005, the EU will implement a CO2 emissions trading scheme. In this paper we show that the outspoken goals of economic efficiency and free allocation of allowances are incompatible with harmonized allocation rules. In general, the assignment of allowances is endogenous and differs widely across countries, thereby substantiating concerns for implicit state aid and competitive distortions. We discuss potential adjustments to the Directive in order to allow for harmonization, i.e. for identical assignment factors to similar firms located in different EU countries.

96/04345 Development and validation of a computer model for assessing energy demand and supply patterns in the urban environemt

Regulatory instruments for greenhouse gas control present a policy dilemma: Market-based instruments such as cap and trade function to reduce regulatory costs; but because they provide no guarantee that costs will be reduced to acceptable levels it is infeasible to set caps at sustainable levels. Emission taxes provide cost certainty, but their comparatively high cost makes it infeasible to set tax rates at levels commensurate with sustainability goals. However, there is a straightforward solution to this dilemma: Just as cap and trade uses free allowance allocation to minimize regulatory costs, an emission tax's cost can be mitigated by refunding tax revenue in such a way that emission reduction becomes profitable. A refunded tax, like cap and trade with free allocation, would be revenue-neutral within the regulated industry. Marginal competitive incentives for commercializing emission-reducing technologies would not be diminished by the refund, and the refund could actually make it politically and economically feasible to increase the incentives by an order of magnitude. Whereas cap and trade merely caps emissions at an unsustainable level while subjecting the economy to extreme price volatility, refunded emission taxes could create a stable investment environment with sustained incentives for emission reduction over a long-term investment horizon.