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Contingent certificate allocation rules and incentives for power plant investment and disinvestment

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  • Christoph Weber
  • Philip Vogel

Abstract

The electricity generation mix of many countries is strongly dominated by fossil fuelled power plants. $$\hbox {CO}_{2}$$ CO 2 certificate trading is then advocated as a first best instrument for emission abatement in Europe, the US and beyond. An important element of the trading scheme is the initial allocation of allowances. This article is to show how permit allocation rules, applied within an Emission Trading System (ETS), interfere with the long-term pricing and investment on power markets. In particular it is demonstrated that free allocation of certificates contingent on plant availability and fuel used is likely to provide distorting incentives both for continued operation of existing plants and for investments. Consequently, marginal abatement costs within the ETS are increased above efficient levels and new power plant investments may crowd out excessively older power plants. Analytical results are derived for two technology cases and a numerical case study is devoted to the EU 27 power sector. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Christoph Weber & Philip Vogel, 2014. "Contingent certificate allocation rules and incentives for power plant investment and disinvestment," Journal of Regulatory Economics, Springer, vol. 46(3), pages 292-317, December.
    • Handle: RePEc:kap:regeco:v:46:y:2014:i:3:p:292-317
    DOI: 10.1007/s11149-014-9257-8
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    Cited by:

    1. Bucksteeg, Michael & Mikurda, Jennifer & Weber, Christoph, 2023. "Integration of power-to-gas into electricity markets during the ramp-up phase—Assessing the role of carbon pricing," Energy Economics, Elsevier, vol. 124(C).
    2. You-hua Chen & Chan Wang & Pu-yan Nie, 2020. "Emission regulation of conventional energy-intensive industries," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 22(4), pages 3723-3737, April.
    3. Botor, Benjamin & Böcker, Benjamin & Kallabis, Thomas & Weber, Christoph, 2021. "Information shocks and profitability risks for power plant investments – impacts of policy instruments," Energy Economics, Elsevier, vol. 102(C).

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    More about this item

    Keywords

    Emission trading; Allocation of emission permits; Electricity markets; Power plant portfolio; Mixed complementary program; Q54; Q58; Q56;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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