A. Denny Ellerman

The European Union Emissions Trading Scheme: Origins, Allocation, and Early Results

The European Union Emissions Trading Scheme (EU ETS) is the worlds first large experiment with an emissions trading system for carbon dioxide (CO2) and it is likely to be copied by others if there is to be a global regime for limiting greenhouse gas emissions. After providing a brief discussion of the origins of the EU ETS, its relation to the Kyoto Protocol, and its precedents in Europe and the U.S., this paper focuses on allowance allocation—the process of deciding who will receive the newly limited rights to emit CO2. We describe how allowances were allocated in the EU ETS, with particular emphasis on the issues and problems encountered, including the lack of readily available installation-level data, the participants in the process, the use of projections, the choices of Member States with respect to auctioning, benchmarking, and new entrant provisions, and the difficult issue of deciding to whom the expected shortage was to be allocated. Finally, we discuss the recently available data on 2005 emissions and what they indicate concerning over-allocation, trading patterns, and abatement. We conclude with some observations about the broader implications of the EU ETS, what seems to be unique about CO2, and the fact that non-economic considerations inform the allocation of allowances.

The safety valve and climate policy

Abstract The “safety valve” is a possible addition to a cap-and-trade system of emissions regulation whereby the authority offers to sell permits in unlimited amount at a pre-set price. In this way the cost of meeting the cap can be limited. It was proposed in the US as a way to control perceived high costs of the Kyoto Protocol, and possibly as a way to shift the focus of policy from the quantity targets of the Protocol to emissions price. In international discussions, the idea emerged as a proposal for a compliance penalty. The usefulness of the safety valve depends on the conditions under which it might be introduced. For a time it might tame an overly stringent emissions target. It also can help control the price volatility during the introduction of gradually tightening one, although permit banking can ultimately serve the same function. It is unlikely to serve as a long-term feature of a cap-and-trade system, however, because of the complexity of coordinating price and quantity instruments and because it will interfere with the development of systems of international emissions trade.

Absolute versus intensity-based emission caps

Abstract Cap-and-trade systems limit emissions to some pre-specified absolute quantity. Intensity-based limits, that restrict emissions to some pre-specified rate relative to input or output, are much more widely used in environmental regulation and have gained attention recently within the context of greenhouse gas (GHG) emissions trading. In this paper we provide a non-technical introduction to the differences between these two forms of emission limits. Our aim is not to advocate either form, but to elucidate the properties of each in a world where future emissions and GDP are not known with certainty. We argue that the two forms have identical effects in a world where future emissions and economic output (i.e. GDP) are known with certainty, and show that outcomes for marginal costs, abatement, emissions and welfare diverge only because of the variance of actual future GDP relative to its forecast expectation.

Allocation in the European Emissions Trading Scheme : rights, rents and fairness

List of figures List of boxes List of tables Contributors Foreword Acknowledgements Glossary and abbreviations Part I. The EU ETS Allocation Process: 1. The EU ETS allocation process: an overview A. Denny Ellerman, Barbara K. Buchner, and Carlo Carraro 2. A brief but lively chapter in EU climate policy: the commissions perspective Peter Zapfel Part II. Experiences from Member States in Allocating Allowances: 3. United Kingdom David Harrison and Daniel Radov 4. Germany Felix Christian Matthes and Franzjosef Schafhausen 5. Denmark Sigurd Lauge Pedersen 6. Sweden Lars Zetterberg 7. Ireland Conor Barry 8. Spain Pablo Del Rio 9. Italy Daniele Agostini 10. Hungary Istvan Bart 11. Czech Republic Tomas Chmelik 12. Poland Boleslaw Jankowski Part III. Concluding Remarks and Background Material: 13. Unifying themes A. Denny Ellerman, Barbara K. Buchner, and Carlo Carraro Appendix I. Participant list Appendix II. The individual country outline Appendix III. The country tables Appendix IV. Background material from the European Commission Index.

The world price of coal

A significant increase in the seaborne trade for coal over the past 20 years has unified formerly separate coal markets into a world market in which prices move in tandem. By virtue of its large domestic market, the USA has become the residual supplier and price setter in the world coal market. Changes in multifactor productivity have been the primary cause of the long-term fluctuations in coal prices that have been observed in the USA since the end of the Second World War and in the world coal market.

Assessing the impact of carbon tax differentiation in the European Union

To what extent do the welfare costs associated with the implementation of the Burden Sharing Agreement in the European Union depend on sectoral allocation of emissions rights? What are the prospects for strategic climate policy to favor domestic production? This paper attempts to answer those questions using a CGE model featuring a detailed representation of the European economies. First, numerical simulations show that equalizing marginal abatement costs across domestic sectors greatly reduces the burden of the emissions constraint but also that other allocations may be preferable for some countries because of pre-existing tax distortions. Second, we show that the effect of a single countrys attempt to undertake a strategic policy to limit impacts on its domestic energy-intensive industries has mixed effects. Exempting energy-intensive industries from the reduction program is a costly solution to maintain the international competitiveness of these industries; a tax-cum-subsidy approach is shown to be better than exemption policy to sustain exports. The welfare impact either policy – exemption or subsidy – on other European countries is likely to be small because of general equilibrium effects.

The allocation of European Union allowances : lessons, unifying themes and general principles

This paper is the concluding chapter of Rights, Rents and Fairness: Allocation in the European Emissions Trading Scheme, edited by the co-authors and forthcoming from Cambridge University Press. The main objective of this paper is to distill the lessons and general principles to be learnt from the allocation of allowances in the European Union Emission Trading Scheme (EU ETS), i.e. in the worlds first experience with allocating carbon allowances to sub-national entities. We discuss the lessons that emerge from this experience and make some comments on what seem to be more general principles informing the allocation process and on what are the global implications of the EU ETS. As has become obvious during the first allocation phase, the diversity of experience among the Member States is considerable, so that it must be understood that these lessons and unifying themes are drawn from the experience of most of the Member States, not necessarily from all. Lessons and unifying observations are grouped in three categories: those concerning the conditions encountered, the processes employed, and the actual choices.

The Effects on Developing Countries of the Kyoto Protocol and Carbon Dioxide Emissions Trading

The trading of rights to emit carbon dioxide has not officially been sanctioned by the United Nations Framework Convention on Climate Change, but it is of interest to investigate the consequences, both for industrial (Annex B) and developing countries, of allowing such trades. The authors examine the trading of caps assigned to Annex B countries under the Kyoto Protocol and compare the outcome with a world in which Annex B countries meet with their Kyoto targets without trading. Under the trading scenario the former Soviet Union is the main seller of carbon dioxide permits and Japan, the European Union, and the United States are the main buyers. Permit trading is estimated to reduce the aggregate cost of meeting the Kyoto targets by about 50 percent, compared with no trading. Developing countries, though they do not trade, are nonetheless affected by trading. For example, the price of oil and the demand for other developing country exports are higher with trading than without. The authors also consider what might happen if developing countries were to voluntarily accept caps equal to Business as Usual Emissions and were allowed to sell emission reductions below these caps to Annex B countries. The gains from emissions trading could be big enough to give buyers and sellers incentive to support the system. Indeed, a global market for rights to emit carbon dioxide could reduce the cost of meeting the Kyoto targets by almost 90 percent, if the market were to operate competitively. The division of trading gains, however, may make a competitive outcome unlikely: Under perfect competition, the vast majority of trading gains go to buyers of permits rather than to sellers. Even markets in which the supply of permits is restricted can, however, substantially reduce the cost to Annex B countries of meeting their Kyoto targets, while yielding profits to developing countries that elect to sell permits.

The European Union Emissions Trading System: Ten Years and Counting

This article provides an introduction to the European Union (EU) Emissions Trading System (ETS). First we describe the legislative development of the EU ETS, its evolution from free allocation to auctioning and centralized allocation rules, its relationship to the Kyoto Protocol and other trading systems, and its relationship to other EU climate and energy policies. This is followed by an assessment of the performance of the EU ETS, which focuses in particular on emissions, allowance prices, and the use of offsets. We conclude with a discussion of the current debate about the future of the EU ETS and proposals for changes to both the EU ETS and the climate policy environment in which it operates. ( JEL: Q54, Q58)

SHORT-TERM CO2 ABATEMENT IN THE EUROPEAN POWER SECTOR: 2005–2006

This paper provides an estimate of short-term abatement of CO2 emissions through fuel switching in the European power sector in response to the CO2 price imposed by the EU Emissions Trading Scheme (EU ETS) in 2005 and 2006. The estimate is based on the use of a highly detailed simulation model of the European power sector in which abatement is the difference between simulations of actual conditions with and without the observed CO2 price. We estimate that the cumulative abatement over this period was about 53 million metric tons. The paper also explains the complex relationship between abatement and daily, weekly, and seasonal variations in load, relative fuel prices, and the price of CO2 allowances.