Free Allocation and the Endowment Effect in Cap-and-Trade Systems: Evidence from the European Electricity Sector

Independence of installation-level emissions from endowments of allowances allocated for free constitutes a necessary condition for the cost-effectiveness of a cap-and-trade system. A causal relationship between allocations and emissions suggests the presence of an endowment effect induced by free allocation and indicates a loss in cost effectiveness. The issue is relevant to the EU's Emissions Trading System (EU ETS), where a large share of the total allocation occurs for free. This paper tests for the presence of an endowment effect among European electricity sector plants as regulated under the EU ETS by evaluating whether growth in plant-level emissions of power generators changed due to a switch from free allocation to full auctioning. To overcome the endogeneity of allocations I exploit a natural experiment inducing exogenous variation in the allocation of allowances to power producers. While electricity producers located in EU-15 countries were subject to full auctioning starting in 2013, free allocation continued under the so-called 10c rule in eight member states. I apply a matched difference-in-differences research design to a unique EU-wide plant-level dataset of emissions and technical characteristics, constructing a synthetic control group. I find no evidence of a general endowment effect. However, there is some evidence in favor of an endowment effect for a sub-sample of small emitters

Stationarity Changes in Long-Run Fossil Resource Prices: Evidence from Persistence Break Testing

This paper considers the question of whether changes in persistence have occurred during the long-run evolution of U.S. prices of the non-renewable energy resources crude oil, natural gas and bituminous coal. Our main contribution is to allow for a structural break when testing for a break in persistence, thus disentangling the effect of a deterministic break from that of a stochastic break and advancing the existing literature on the persistence properties of non-renewable resource prices. The results clearly demonstrate the importance of specifying a structural break when testing for breaks in persistence, whereas our findings are robust to the exact date of the structural break. Our analysis yields that coal and natural gas prices are trend stationary throughout their evolution, while oil prices exhibit a break in persistence during the 1970s. The findings suggest that especially the coal market has remained fundamentals-driven, whereas for the oil market exogenous shocks have become dominant. Thus, our results are consequential for the treatment of energy resource prices in both causal analysis and forecasting.non-renewable resource prices, primary energy, persistence, structural breaks

The Dynamics of Global Crude Oil Production

We analyze the dynamic effect of prices and price volatility on current oil production, both on the level of country groups and the major individual producer countries. A comprehensive dataset at monthly frequency allows us to include a rich lag structure while controlling for key global and local determinants as well as seasonality. Our set of explanatory variables also includes real economic activity, investment, the strength of the U.S. dollar and institutional quality. We provide a naïve regression analysis using a broad model to show that lagged explanatory variables are important determinants of current oil production. We find that the reaction of oil production is heterogeneous across both country groups and the major individual producer countries.Crude oil, prices and production, dynamic time series

EU emissions trading: Distinctive behavior of small companies

The EU Emissions Trading System (EU ETS) is the cornerstone of the European Union's climate policy and covers just under half of the EU's greenhouse gas emissions. More than ten years since the EU ETS was first introduced, there continues to be substantial research interest regarding its functioning and the behavior of participating companies. DIW Berlin conducted three econometric studies based on microdata at company and/or installation level. The findings suggest that, overall, there are only minor distortions in the behavior of companies regulated by the EU ETS. However, the studies also show that small companies exhibit distinctive behavior which could result in inefficiencies. For instance, during Trading Phase I, small companies participated less actively in trading allowances than companies with a higher turnover. Moreover, the emissions produced by small power plants depend, to a certain extent, on the allocation rules. Small companies also often fail to take full advantage of the cost reduction potential of international offset credits: for a total of 22 percent of all companies (predominantly small emitters), an average of 31,000 euros in cost reduction potential remained unused. The barriers causing this loss may be interpreted as fixed transaction costs. For further ex-post analyses, the timely provision of user-friendly emissions trading data at the installation level would be very beneficial

Europäischer Emissionshandel: Besonderheiten im Verhalten kleiner Unternehmen

Das europäische Emissionshandelssystem ist das zentrale Element der EU-Klimapolitik und umfasst knapp die Hälfte der europäischen Treibhausgasemissionen. Mehr als zehn Jahre nach seiner Einführung besteht ein großes Forschungsinteresse an seiner Funktionsfähigkeit und am Verhalten der betroffenen Unternehmen. Die Ergebnisse dreier am DIW Berlin erstellter ökonometrischer Studien auf Basis von Mikrodaten auf Unternehmens- beziehungsweise Anlagenebene deuten darauf hin, dass es insgesamt nur geringe Verzerrungen im Firmenverhalten gibt. Allerdings zeigen sich Besonderheiten im Verhalten kleiner Unternehmen, aus denen Ineffizienzen resultieren können. So nahmen kleine Unternehmen in der ersten Handelsperiode weniger aktiv am Zertifikatehandel teil als umsatzstärkere Firmen. Zudem hängen die Emissionen kleiner Kraftwerksanlagen in einem gewissen Maß von den Zuteilungsregeln ab. Auch die Kostensenkungspotenziale aus internationalen Emissionsgutschriften nutzen kleine Unternehmen teilweise nicht: So ließen 22 Prozent aller Unternehmen, ganz überwiegend kleine Emittenten, Kostensenkungspotenziale von durchschnittlich 31 000 Euro ungenutzt. Der Grund hierfür waren vermutlich Hemmnisse, die sich als fixe Transaktionskosten interpretieren lassen. Für weitergehende Ex-post-Analysen wäre eine zeitnahe und nutzerfreundliche Bereitstellung von anlagenspezifischen Emissionshandelsdaten von großem Nutzen.The EU Emissions Trading System (EU ETS) is the cornerstone of the European Union's climate policy and covers just under half of the EU's greenhouse gas emissions. More than ten years since the EU ETS was first introduced, there continues to be substantial research interest regarding its workings and the behavior of participating companies. DIW Berlin conducted three econometric studies based on microdata at the company and/or installation level. The findings suggest that, overall, there are only minor distortions in the behavior of companies regulated by the EU ETS. However, the studies also show that small companies exhibit distinctive behavior which could result in inefficiencies. For instance, during trading phase one, small companies participated less actively in trading emissions allowances than companies with a higher turnover. Moreover, the emissions produced by small power plants depend, to a certain extent, on the allocation rules. Small companies also often fail to take full advantage of the cost reduction potential of international offset credits: for a total of 22 percent of all companies (predominantly small emitters), an average of 31,000 euros in cost reduction potential remained unused. The barriers causing this loss may be interpreted as fixed transaction costs. For further ex post analyses, the timely provision of userfriendly emissions trading data at the installation level would be very beneficial

Europe's mechanism for countering the risk of carbon leakage

The EU's Emissions Trading System (EU ETS) is a regional cap-and-trade program in a world with no binding international climate agreement. This climate regulation may induce a relocation of production away from Europe, with potentially negative consequences for the European economy. This relocation could lead to carbon leakage, i.e. a shift of greenhouse gas emissions from Europe into regions with less stringent climate policy. In response, installations in sectors deemed to be vulnerable receive compensatory free emissions allowances. The European Commission compiles a carbon leakage list of vulnerable sectors. The current mechanism distinguishes two levels of leakage risk. The criteria used lead to the majority of European industry regulated under the EU ETS benefiting from the additional compensation. Whereas industry representatives argue that the current level of compensation should be maintained if not increased, the evidence suggests that under the current framework overcompensation may occur. We describe the mechanism currently used to address the risk of carbon leakage in Europe, and for comparison outline the more differentiated system of assessing leakage risk used in the Californian cap-and-trade system. Applying such a more differentiated mechanism in the European context would lead to a re-distribution of compensation from sectors with an intermediate level of leakage risk to high-risk sectors

Why Do Emitters Trade Carbon Permits? Firm-Level Evidence from the European Emission Trading Scheme

À la fin des années cinquante, puis tout au long des années soixante, le théâtre égyptien brillait de tous ses feux et attirait écrivains et artistes. Après les débuts remarquables de Nu'mân 'Achûr avec Al-Maghnatîs (« L'Aimant ») et ceux de l'auteur de ces lignes avec Suqût far'awûn (« La chute de Pharaon »), c'est Mikhaïl Rummân, Sa'd al-Din Wahba et Youssef Idris, sans oublier Salah 'Abd al-Sabûr et 'Abd al-Rahman al-Charqâwî, qui allaient rejoindre le cercle des dramaturges. Une nouvelle ..

An Analysis of Allowance Banking in the EU ETS

The existence of some 2 billion unused EU Allowances (EUAs) at the end of Phase II of the EU s Emissions Trading System (EU ETS) has sparked considerable debate about structural shortcomings of the EU ETS. However, there has been a surprising lack of interest in considering the accumulation of EUAs in light of the theory of intertemporal permit trading, i.e. allowance banking. In this paper we adapt basic banking theory to the case of a linearly declining cap, as is common in greenhouse gas control systems. We show that it is perfectly rational for agents to decrease emissions beyond the constraint imposed by the cap initially, accumulating an allowance bank and then drawing it down in the interest of minimizing abatement cost over time. Having laid out the theory, we carry out a set of simulations for a reasonable range of key parameters, geared to the EU ETS, to illustrate the effects of intertemporal optimization of abatement decisions on optimal time paths of emissions and allowance prices. We conclude that bank accumulation as the result of intertemporal abatement cost optimization should be considered at least a partial explanation when evaluating the current discrepancy between the cap and observed emissions