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How Emission Certificate Allocations Distort Fossil Investments: The German Example

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  • Pahle, Michael
  • Fan, Lin
  • Schill, Wolf-Peter

Abstract

Despite political activities to foster a low-carbon energy transition, Germany currently sees a considerable number of new coal power plants being added to its power mix. There are several possible drivers for this "dash for coal", but it is widely accepted that windfall profits gained through free allocation of ETS certificates play an important role. Yet the quantification of allocation-related investment distortions has been limited to back-of-the envelope calculations and stylized models so far. We close this gap with a numerical model integrating both Germany's particular allocation rules and its specific power generation structure. We find that technology specific new entrant provisions have substantially increased incentives to invest in hard coal plants red to natural gas at the time of the ETS onset. More precisely, disproportionate windfall profits compared more than half the total capital costs of a hard coal plant. Moreover, shorter periods of free allocations would not have turned investors' favours towards the cleaner natural gas technology because of pre-existing economic advantages for coal. In contrast, full auctioning of permits or a single best available technology benchmark would have made natural gas the predominant technology of choice.

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  • Pahle, Michael & Fan, Lin & Schill, Wolf-Peter, 2011. "How Emission Certificate Allocations Distort Fossil Investments: The German Example," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 39(4), pages 1975-1987.
    • Handle: RePEc:zbw:espost:118698
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    Cited by:

    1. Stephen Lecourt & Clément Pallière & Oliver Sartor, 2013. "The impact of emissions-performance benchmarking on free allocations in EU ETS Phase 3," RSCAS Working Papers 2013/17, European University Institute.
    2. Lei, Xu & Xin-gang, Zhao, 2023. "The synergistic effect between Renewable Portfolio Standards and carbon emission trading system: A perspective of China," Renewable Energy, Elsevier, vol. 211(C), pages 1010-1023.
    3. Stephen Lecourt & Clement Palliere & Oliver Sartor, 2013. "Free allocations in EU ETS Phase 3: The impact of emissions-performance benchmarking for carbonintensive industry," Working Papers 1302, Chaire Economie du climat.
    4. Pape, Christian, 2018. "The impact of intraday markets on the market value of flexibility — Decomposing effects on profile and the imbalance costs," Energy Economics, Elsevier, vol. 76(C), pages 186-201.
    5. Gregor Zoettl, 2021. "Emission trading systems and the optimal technology mix," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 12(2), pages 281-327, June.
    6. Frédéric Branger & Jean-Pierre Ponssard & Oliver Sartor & Misato Sato, 2015. "EU ETS, Free Allocations, and Activity Level Thresholds: The Devil Lies in the Details," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 2(3), pages 401-437.
    7. Falbo, Paolo & Felletti, Daniele & Stefani, Silvana, 2013. "Free EUAs and fuel switching," Energy Economics, Elsevier, vol. 35(C), pages 14-21.
    8. Xiong, Ling & Shen, Bo & Qi, Shaozhou & Price, Lynn & Ye, Bin, 2017. "The allowance mechanism of China’s carbon trading pilots: A comparative analysis with schemes in EU and California," Applied Energy, Elsevier, vol. 185(P2), pages 1849-1859.
    9. Magdalena Bernaciak & Aleksandra Lis, 2017. "Weak Labour, Strong Interests: Polish Trade Unions and the Integration of EU Energy and Service Markets," Journal of Common Market Studies, Wiley Blackwell, vol. 55(3), pages 432-448, May.
    10. Oliver Sartor, 2012. "Carbon Leakage in the Primary Aluminium Sector," Working Papers hal-00776451, HAL.
    11. Lin-Ju Chen & Lei Zhu & Ying Fan & Sheng-Hua Cai, 2013. "Long-Term Impacts of Carbon Tax and Feed-in Tariff Policies on China's Generating Portfolio and Carbon Emissions: A Multi-Agent-Based Analysis," Energy & Environment, , vol. 24(7-8), pages 1271-1293, December.
    12. Christian Pape, 2017. "The impact of intraday markets on the market value of flexibility–Decomposing effects on profile and the imbalance costs," EWL Working Papers 1711, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Dec 2017.
    13. 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.
    14. Xiling Zhang & Xiaoqian Liu & Zeyu Zhang & Ruiyi Tang & Ting Zhang & Jian Yao, 2024. "The Synergistic Effect of the Carbon Emission Trading Scheme on Pollution and Carbon Reduction in China’s Power Industry," Sustainability, MDPI, vol. 16(19), pages 1-17, October.
    15. Germeshausen, Robert, 2018. "The European Union emissions trading scheme and fuel efficiency of fossil fuel power plants in Germany," ZEW Discussion Papers 18-007, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    Keywords

    Electricity sector investments; Windfall profits; ETS allocations;
    All these keywords.

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • 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

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