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The role of auctions and forward markets in the EU ETS: counterbalancing the cost-inefficiencies of combining generous allocation with a ban on banking

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  • Karl-Martin Ehrhart
  • Christian Hoppe
  • Joachim Schleich
  • Stefan Seifert

Abstract

From an analysis of the available national allocation plans for the first period (2005-2007) of the EU emissions trading scheme (EU ETS), it can be inferred that (i) the total allocation to installations covered under the EU ETS is rather generous and (ii) most EU Member States ban the transfer of allowances (banking) into the second period (2008-2012). In this article, we explore the cost-efficiency issues associated with such a generous allocation of allowances to the trading sectors in combination with the ban on banking. It is argued that allocation to the trading sectors is higher than implied by a cost-minimization approach. Moreover, due to the reduced level of flexibility, a ban on banking increases overall compliance costs. In addition, the results of a simulation game conducted with real company participants and with a student control group suggest that a generous primary allocation in the first phase combined with a ban on banking also leads to a cost-inefficient choice of abatement measures within periods. The results of the simulations are also consistent with the conjecture that forward markets and auctioning off a part of the total quantity of allowances result in more reliable price signals and more cost-efficient outcomes.

Suggested Citation

  • Karl-Martin Ehrhart & Christian Hoppe & Joachim Schleich & Stefan Seifert, 2005. "The role of auctions and forward markets in the EU ETS: counterbalancing the cost-inefficiencies of combining generous allocation with a ban on banking," Climate Policy, Taylor & Francis Journals, vol. 5(1), pages 31-46, January.
    • Handle: RePEc:taf:tcpoxx:v:5:y:2005:i:1:p:31-46
    DOI: 10.1080/14693062.2005.9685539
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    References listed on IDEAS

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    1. Lawrence M. Ausubel & Peter Cramton & Marek Pycia & Marzena Rostek & Marek Weretka, 2014. "Demand Reduction and Inefficiency in Multi-Unit Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(4), pages 1366-1400.
    2. Ellerman, A.D. & Juan-Pablo Montero, 2002. "The Temporal Efficiency of SO2 Emissions Trading," Cambridge Working Papers in Economics 0231, Faculty of Economics, University of Cambridge.
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    Cited by:

    1. Martin Larsson, 2017. "EU Emissions Trading: Policy-Induced Innovation, or Business as Usual? Findings from Company Case Studies in the Republic of Croatia," Working Papers 1705, The Institute of Economics, Zagreb.
    2. Emilie Alberola & Julien Chevallier, 2009. "European Carbon Prices and Banking Restrictions: Evidence from Phase I (2005-2007)," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 51-80.
    3. Rogge, Karoline S. & Schleich, Joachim & Betz, Regina, 2006. "An early assessment of national allocation plans for phase 2 of EU emission trading," Working Papers "Sustainability and Innovation" S1/2006, Fraunhofer Institute for Systems and Innovation Research (ISI).
    4. Hyemin Park & Minkyung Lee, 2021. "Factors determining firms’ trading decision in the Korea ETS market," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 23(3), pages 557-580, July.
    5. Regina Betz & Ben Greiner & Sascha Schweitzer & Stefan Seifert, 2017. "Auction Format and Auction Sequence in Multi‐item Multi‐unit Auctions: An Experimental Study," Economic Journal, Royal Economic Society, vol. 127(605), pages 351-371, October.
    6. Schleich, Joachim & Rogge, Karoline S. & Betz, Regina, 2008. "Incentives for energy efficiency in the EU Emissions Trading Scheme," Working Papers "Sustainability and Innovation" S2/2008, Fraunhofer Institute for Systems and Innovation Research (ISI).
    7. Emilie Alberola & Julien Chevallier, 2007. "European carbon prices and banking restrictions: evidence from phase I (2005-2007)," Working Papers hal-04139202, HAL.
    8. Emilie Alberola & Julien Chevallier, 2009. "European Carbon Prices and Banking Restrictions: Evidence from Phase I (2005-2007)," The Energy Journal, , vol. 30(3), pages 51-80, July.

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