Impact of the allowance allocation on prices and efficiency

Karsten Neuhoff (), Michael Grubb and Kim Keats

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Successful cap and trade programs for SO2 and NOx in the US allocate allowances to large emitters based on a historic base line for a period of up to thirty years. National Allocation Plans in Europe allocate CO2 allowances in an iterative approach first for a three then for a five-year period. The potential updating of the base line creates perverse incentives for operation and investment. Some allowances are also reserved for new entrants further distorting the scheme. We use analytic models and numeric simulations for the UK power sector to illustrate and quantify how these effects contribute to an inflation of the allowance price while reducing utilisation and investment in efficient technologies. The inflated allowance prices are likely to increase the European allowance budget and emissions, e.g. through the Linking Directive. As a result opportunity costs of emitting CO2 are reduced relative to an efficient cap and trade program.

Keywords: : Emission Trading; Allowance Allocation; Investment Decision; Operation; Inefficiencies. (search for similar items in EconPapers)
JEL-codes: D24 D92 L10 Q28 (search for similar items in EconPapers)
Pages: 23
Date: 2005-11
New Economics Papers: this item is included in nep-agr, nep-cse, nep-ene and nep-env
Note: EPRG, IO
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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http://www.electricitypolicy.org.uk/pubs/wp/eprg0508.pdf (application/pdf)

Related works:
Working Paper: Impact of the Allowance Allocation on Prices and Efficiency (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0552

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