Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector

The allowance allocation under the European Emission trading schemes differs fundamentally from earlier cap and trade programs, like SO2 and NOx in the USA. Because of the iterative nature of negotiations of the overall budget, the allocation also has to follow an iterative process. If power generators anticipate that their current behaviour will affect future allowance allocation, then this can distort today’s decisions. Furthermore, the National Allocation Plans (NAPs) contain multiple provisions dealing with existing installations, what happens to allocation when they close, and allocations to new entrants. We provide a framework to assess the economic incentives and distortions that provisions in NAPs can have on market prices, operation and investment decisions. To this end, we use both analytic models to illustrate the incentives effects and results from numerical simulation runs that estimate the magnitude of impacts from different allocation rules

Assessing Emission Allocation in Europe: An Interactive Simulation Approach

Implementation of an EU-wide emissions trading system by means of National Allocation Plans is at the core of European environmental policy agenda. Member States are faced with the problem of allocating their national emission budgets under the EU Burden Sharing Agreement between energy-intensive sectors that are eligible for international emissions trading and the remaining segments of their economies that will be subject to complementary domestic emission regulation. The country-specific segmentation of national emission budgets between trading sectors and non-trading sectors will determine the cost efficiency of the EU emissions trading system and the gains for each Member State vis-?-vis domestic abatement policies. We present an interactive simulation model where users can specify the design of National Allocation Plans for each EU Member State and then evaluate the induced economic effects. Our numerical framework is based on marginal abatement cost curves for (emissions) trading and non-trading sectors of the EU-15 economies. Illustrative simulations highlight the importance of a coordinated design of National Allocation Plans in order to avoid substantial excess costs of regulation and drastic burden shifting between nontrading and trading sectors. --emissions trading,allowance allocation,National Allocation Plans

Minimum Distortion Variance Concatenated Block Codes for Embedded Source Transmission

Some state-of-art multimedia source encoders produce embedded source bit streams that upon the reliable reception of only a fraction of the total bit stream, the decoder is able reconstruct the source up to a basic quality. Reliable reception of later source bits gradually improve the reconstruction quality. Examples include scalable extensions of H.264/AVC and progressive image coders such as JPEG2000. To provide an efficient protection for embedded source bit streams, a concatenated block coding scheme using a minimum mean distortion criterion was considered in the past. Although, the original design was shown to achieve better mean distortion characteristics than previous studies, the proposed coding structure was leading to dramatic quality fluctuations. In this paper, a modification of the original design is first presented and then the second order statistics of the distortion is taken into account in the optimization. More specifically, an extension scheme is proposed using a minimum distortion variance optimization criterion. This robust system design is tested for an image transmission scenario. Numerical results show that the proposed extension achieves significantly lower variance than the original design, while showing similar mean distortion performance using both convolutional codes and low density parity check codes.Comment: 6 pages, 4 figures, In Proc. of International Conference on Computing, Networking and Communications, ICNC 2014, Hawaii, US

Impact of the allowance allocation on prices and efficiency

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