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

Author

Listed:
  • Simone Borghesi

    (University of Siena)

  • Massimiliano Montini

    (University of Siena)

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.

Suggested Citation

  • Simone Borghesi & Massimiliano Montini, 2015. "The allocation of carbon emission permits; theoretical aspects and practical problems in the EU ETS," Working papers wpaper75, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    • Handle: RePEc:fes:wpaper:wpaper75
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    References listed on IDEAS

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    More about this item

    Keywords

    Emission Trading Scheme; Grandfathering; Auctioning; Backloading; New Entrants Reserve.;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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