The allocation of carbon emission permits; theoretical aspects and practical problems in the EU ETS

Simone Borghesi and Massimiliano Montini
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Massimiliano Montini: University of Siena

Working papers from Financialisation, Economy, Society & Sustainable Development (FESSUD) Project

Abstract: The paper investigates the effectiveness of the progressive shift towards the auctioning system within the EU ETS and the practical difficulties that such a shift is encountering on its way. For this purpose, it first examines the theoretical debate on the optimal allocation method underlying the ETS and describes the current allocation regime of the European Union Allowances, presenting the general rules as well as the special provisions to address specific sectors (e.g. aviation and electricity generation). Then it discusses the main problems that have been emerging so far in terms of:(i) possible carbon leakage arising in some of the ETS sectors, (ii) unsatisfactory results of the NER (New Entrant Reserve) program, (iii) intertemporal evolution of the auction price and corresponding revenues, and (iv) the much debated backloading proposal, that is the idea of temporarily halting and postponing further auctions due to the lack of permits’ demand. The comparison of the theoretical debate with the practical difficulties arising in real world applications, highlights that a long way is still to go to achieve an optimal allocation method.

Keywords: Emission Trading Scheme; Grandfathering; Auctioning; Backloading; New Entrants Reserve. (search for similar items in EconPapers)
JEL-codes: L11 Q42 Q43 Q48 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2015-01-01
New Economics Papers: this item is included in nep-ene and nep-reg
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