Skip to main content
Article thumbnail
Location of Repository

Impact of the allowance allocation on prices and efficiency

By Karsten Neuhoff, Michael Grubb and Kim Keats

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

Topics: Emission Trading, Allowance Allocation, Investment Decision, Operation, Inefficiencies, , , Classification-JEL: D24, D92, Q28, L10
Publisher: Faculty of Economics
Year: 2006
OAI identifier: oai:www.repository.cam.ac.uk:1810/131637
Provided by: Apollo

Suggested articles


To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.