EU ETS, free allocations, and activity level thresholds: the devil lies in the details

Frédéric Branger, Jean-Pierre Ponssard, Oliver Sartor and Misato Sato ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: It is well known that discontinuous jumps or thresholds in tax or subsidies are socially inefficient, because they create incentives to make strategic behavioural changes that lead to substantial increases in private benefits. This paper investigates these distortions in the context of the EU Emissions Trading Scheme, where activity level thresholds (ALTs) were introduced in Phase 3 to reduce the overallocation of free allowances to low-activity installations. Using installation-level data, we find evidence that cement producers indeed respond to such thresholds when confronted with low demand, by strategically adjusting output to obtain more free allocation. We estimate that in 2012, ALTs induced excess cement clinker production of 6.4 Mt (5% of total EU output), and in affected regions this further distorted trade patterns and reversed carbon intensity improvements. As intended, ALTs reduced free allocation by 4%; however, a linear scheme (output-based allocation) would have achieved a 32% reduction.

Keywords: activity level thresholds; carbon trading; cement; EU ETC; free allowance allocation (search for similar items in EconPapers)
JEL-codes: D24 H23 L23 L61 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Published in Journal of the Association of Environmental and Resource Economists, September, 2015, 2(3), pp. 401-437. ISSN: 2333-5955

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http://eprints.lse.ac.uk/63354/ Open access version. (application/pdf)

Related works:
Journal Article: EU ETS, Free Allocations, and Activity Level Thresholds: The Devil Lies in the Details (2015)
Working Paper: EU ETS, Free Allocations and Activity Level Thresholds - The Devil Lies in the Detail (2015)
Working Paper: EU ETS, Free Allocations and Activity Level Thresholds. The devil lies in the details (2014)
Working Paper: EU ETS, Free Allocations and Activity Level Thresholds. The devil lies in the details (2014)
Working Paper: EU ETS, free allocations and activity level thresholds, the devil lies in the details (2014)
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