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

Solving the clinker dilemma with hybrid output-based allocation

This paper proposes an innovative solution to distribute free allowances to the cement sector under emissions trading systems, called hybrid output-based allocation (OBA). We demonstrate that unlike many of the allocation methods currently being used, our design provides incentives which are aligned with the mitigation options available to this sector in the short to medium term. Specifically, it increases the incentive to improve the carbon intensity of clinker production; reduces the incentive to import clinker to avoid carbon costs; increases the incentive to use more low-carbon clinker alternatives to produce cement; and finally it reduces excess allocation and reduces incentives to inflate production volumes to obtain more free allowances. The hybrid OBA does not, however, provide incentives to reduce the consumption of cement or to bring about break-through technologies, hence should be considered as a mid-term solution to aid the decarbonization of the cement sector in conjunction with other support mechanisms

Solving the clinker dilemma with hybrid output-based allocation

This paper proposes an innovative solution to distribute free allowances to the cement sector under emissions trading systems, called hybrid output-based allocation (OBA). We demonstrate that unlike many of the allocation methods currently being used, our design provides incentives which are aligned with the mitigation options available to this sector in the short to medium term. Specifically, it increases the incentive to improve the carbon intensity of clinker production; reduces the incentive to import clinker to avoid carbon costs; increases the incentive to use more low-carbon clinker alternatives to produce cement; and finally it reduces excess allocation and reduces incentives to inflate production volumes to obtain more free allowances. The hybrid OBA does not, however, provide incentives to reduce the consumption of cement or to bring about breakthrough technologies, hence should be considered as a mid-term solution to aid the decarbonization of the cement sector in conjunction with other support mechanisms

Asymmetric industrial energy prices and international trade

This paper measures the response of bilateral trade flows to differences in industrial energy prices across countries. Using a panel for the period 1996-2011 including 42 countries, 62 sectors and covering 60% of global merchandise trade, we estimate the short-run effects of sector-level energy price asymmetry on trade. We find that changes in relative energy prices have a statistically significant but very small impact on imports. On average, a 10% increase in the energy price difference between two country-sectors increases imports by 0.2%. The impact is larger for energy-intensive sectors. Even in these sectors however, the magnitude of the effect is such that changes in energy price differences across time explain less than 0.01% of the variation in trade flows. Simulations based on our model predict that a †40-65/tCO2 price of carbon in the EU ETS would increase Europe’s imports from the rest of the world by less than 0.05% and decrease exports by 0.2%

The impact of energy prices on industrial investment location: evidence from global firm level data

This study examines the influence of relative energy prices on the geographical distribution of industrial investments across 41 countries. Employing a gravity model framework to analyse firms’ investment location decisions, we estimate the model using global bilateral investment flows derived from firm-level M&A data. Our findings reveal that a 10% increase in the energy price differential between two countries results in a 3.2% rise in cross-border acquisitions. This effect is most pronounced in energy-intensive industries and transactions targeting emerging economies. Furthermore, policy simulations suggest that the impact of unilateral carbon pricing on cross-border investments is modest

Free Entry, Market Diffusion, and Social Inefficiency with Endogenously Growing Demand

* Revised： [11-04, 2011

Exclusive contracts with complementary inputs

This study constructs a model of anticompetitive exclusive contracts in the presence of complementary inputs. A downstream firm transforms multiple complementary inputs into final products. When complementary input suppliers have market power, upstream competition within a given input market benefits not only the downstream firm (by lowering the input price) but also complementary input suppliers (by raising complementary input prices). The downstream firm is thus unable to earn higher profits even when socially efficient entry is allowed. Hence, the inefficient incumbent supplier can deter socially efficient entry by using exclusive contracts even in the absence of economies of scale and downstream competition. These results have important implications for antitrust agencies, showing the importance of considering the existence of complementary inputs when examining cases of potential anticompetitive exclusive dealing

Do financial markets respond to green opportunities?

This paper investigates whether financial markets respond to firms’ climate actions. We exploit the signing of the Paris Agreement, which required governments to commit to ambitious climate action, as a quasi-natural experiment. Using a proprietary green revenue database, we find that firms deriving a significant fraction of their revenues from green goods and services experience on average a 10% increase in cumulative abnormal returns following the Agreement. The empirical evidence indicates that financial markets are responding to opportunities associated with new green markets, and strengthening climate policies can reallocate capital to support green private sector investment

Carbon emissions and bilateral trade

International trade adds a thick layer of complexity to climate change mitigation efforts. Questions such as “Who is responsible for the emissions from China’s export sectors?” and “Will strengthening domestic climate policy measures lead to relocation of industry and emissions to countries with lax regulation?” are intensely discussed, both in policy and academic circles. Robust evidence on these issues remains limited, however. Many studies have quantified the volumes of embodied carbon in international trade using complex models, but the results appear very sensitive to the model specification, and conflicting results are reported across different studies. Similarly, the evidence on trade impacts from emissions reduction policies has so far relied largely on model simulations. This thesis combines two strands of work. The first part focuses on embodied carbon quantification. It critically reviews and compares the results and methods of existing work then goes on to conduct a first quantification exercise of global embodied carbon in bilateral trade at the product level. The second part measures the response of bilateral trade to industrial energy prices. It estimates the effect of energy price differences on bilateral trade flows, using a panel dataset covering over 80% of global merchandise trade over 16 years. These estimations are used to infer the effect of carbon price differences on trade. The first part reveals a complex mapping of global embodied carbon flows, contrary to the simplified picture portrayed by previous studies using aggregated models. Embodied carbon is found to be particularly concentrated in certain products and in regional trade. It suggests that rather viewing it as an Annex I vs non Annex I issue, grouping countries according to patterns of production and consumption may be more relevant in discussions surrounding climate policy and trade. The second part of the thesis finds evidence that trade tends to develop more between countries with different energy prices. However, this effect is small in magnitude and focused on a few sectors. The findings suggest that measures to ’prevent’ carbon leakage may have limited impact on most sectors, and should be targeted to those most likely to face adverse trade impacts