Project Appraisal in the Reformed EU ETS: Looking for Shortcuts

Per-Olov Johansson (per-olov.johansson@hhs.se)
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Per-Olov Johansson: CERE - the Center for Environmental and Resource Economics

No 2020:17, CERE Working Papers from CERE - the Center for Environmental and Resource Economics

Abstract: The European Union’s Emissions Trading System, EU ETS, has been reformed, shifting the system from a fixed-cap system into a system with an endogenous supply of permits. This paper discusses how to handle the scheme in project appraisal. The focus is on a few relatively straightforward empirical approaches that can be used to approximate how the path of the endogenous supply of permits is affected by an exogenous change in emissions. A particularly surprising feature of the reformed scheme is that an exogenous increase in emissions could cause a reduction in total emissions, a kind of Green Paradox. In addition, overlapping national policies as well as the Paris Agreement to combat climate change that entered into force on 4 November 2016 could neutralize any exogenous impact of the project, reintroducing the ‘waterbed’ so that the project is evaluated as if it sorted under a fixed-cap system. The paper proposes a couple of shortcuts that hopefully simplify economic evaluations of projects affecting the supply of permits. For convenient reference, the paper also lays out the mechanics of the reformed system.

Keywords: Cost–benefit analysis; permits; waterbed puncture; endogenous cap; ETS; climate gases; Paris Agreement (search for similar items in EconPapers)
JEL-codes: H23 H43 Q51 Q54 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2020-12-23
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:slucer:2020_017

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