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Emissions Trading as a Policy InstrumentEvaluation and Prospects$
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Marc Gronwald and Beat Hintermann

Print publication date: 2015

Print ISBN-13: 9780262029285

Published to MIT Press Scholarship Online: January 2016

DOI: 10.7551/mitpress/9780262029285.001.0001

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Benchmark-Based Free Allocations in EU ETS Phase III

Benchmark-Based Free Allocations in EU ETS Phase III

How Much Better Than Phase II?

Chapter:
(p.63) 4 Benchmark-Based Free Allocations in EU ETS Phase III
Source:
Emissions Trading as a Policy Instrument
Author(s):

Oliver Sartor

Stephen Lecourt

Clement Pallière

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262029285.003.0004

This paper exploits a detailed and original database to analyse the welfare and efficiency implications of the move to benchmark-based free allocation rules in EU ETS Phase 3(2013-20). It is shown empirically that the new allocation rules will lead to a material improvement of the distributional welfare properties of free allocation, by reducing the scope for windfall profits in non-electricity sectors of the EU ETS. Evidence also suggests that new rules have the potential to improve the economic efficiency of the EU ETS by forcing a larger share of installations to purchase allowances at the margin. However, although harmonised benchmarks help to reduce the scope for competitive distortions arising from differing allocation levels to installations in the same sector, the use of ex-ante output levels to determine allocations still leaves considerable scope for internal market distortions, as illustrated using the example of the cement sector.

Keywords:   European Union Emissions Trading Scheme (EU ETS), CO2 allowance allocation, Emissions-performance benchmarking

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