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%

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

* Revised： [11-04, 2011

Differentiation and Dynamics of Competitiveness Impacts from the EU ETS

We summarise the main factors that differentiate impacts of the EU ETS on profitability and market share. By examining and sampling a range of sectors, we present some simple metrics and indicators to help judge the nature of potential impacts. We also consider briefly the mitigation response to these impacts by sectors, and how they may evolve over time. The broad conclusion confirms the aggregate findings presented in the existing literature - more participating sectors are likely to profit under the current ETS structure out to 2012 at the cost of a modest loss of market share, but this may not hold for individual companies and regions. The period 2008-12 can assist technology investments and diversification, providing the continuation and basic principles of the EU ETS post-2012 is quickly defined and incentives are in place for sectors to pursue this

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