An Analysis of Allowance Banking in the EU ETS

Ellerman, A. Denny; Valéro, Vanessa; Zaklan, Aleksandar

doi:10.2139/ssrn.2631964

Cited by 17 publications

(11 citation statements)

References 11 publications

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“…What is important is the possibility of banking these unused allowances to the third trading period. In fact, it can be rational for firms to bank emission allowances to future periods in order to minimize abatement costs over time (Ellerman, Valero, & Zaklan, 2015). At the end of 2013, overcapacity reached 2 billion allowances (Carbon Market Watch, 2014; see Figure 1).…”

Section: Hypothesis No 2: Over-allocationmentioning

confidence: 99%

Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms’ competitiveness? Empirical findings from the literature

2018

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Environmental policies may have important consequences for firms' competitiveness or profitability. For the European Union Emissions Trading System (EU ETS) the empirical literature documents that significant emissions reductions have resulted from it. Surprisingly, however, the literature shows that there have been hardly any concurrent negative effects on firms' competitiveness during the first two phases of the scheme (2005-2012). We show that the main explanations for the absence of negative impacts on competitiveness are a large over-allocation of emissions allowances leading to a price drop and the ability of firms to pass costs onto consumers in some sectors. Cost pass-through combined with free allocation, in turn, partly generated windfall profits. In addition, the relatively low importance of energy costs indicated by their average share in the budgets of most manufacturing industries may have limited the impact of the EU ETS. Finally, small but significant stimulating effects on innovation have been found so far. Several factors suggest that over-allocation is likely to remain substantial in the upcoming periods of the scheme. Therefore, we expect to see no negative competitiveness effects from the EU ETS in Phases III and IV (2013-2030). Key policy insights. Empirical literature on the EU ETS shows that there have been hardly any effects on firms' competitiveness or profitability.. One main explanation is a large over-allocation of emissions allowances leading to a price drop. This reduced incentives for innovation.. Moreover, firms were able to pass costs on to consumers in some sectors which partly generated windfall profits.. Innovation effects have so far been small but positive.. We expect to see no negative competitiveness effects on regulated firms in the near future suggesting that no further reliefs for regulated firms are required.

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Section: Hypothesis No 2: Over-allocationmentioning

confidence: 99%

Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms’ competitiveness? Empirical findings from the literature

2018

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“…As a result, there are more emission permits than real emissions [13]. The system has not been able to adapt to exogenous shocks or to cushion the volatility of the price [14,15].…”

Section: Introductionmentioning

confidence: 99%

Institutional Change and Environment: Lessons from the European Emission Trading System

et al. 2018

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After more than ten years of operation of EU-ETS trading, it is time to analyse the results and draw lessons from the experience. Economic research typically considers emission price as the main explanatory variables when measuring the effects of Emission Trading Systems. The novelty of this work is to analyse whether or not trade alone, as an institutional change, is effective in reducing greenhouse gases emissions. The objective of this paper is to analyse to what extent the EU-ETS as a "regulatory" instrument of the supply of allowances is responsible for the effectiveness of the carbon market as a basic tool in the reduction of emissions. The analysis also includes other overlapping policies aimed at fighting climate change, for example, the promotion of renewables. For the empirical analysis, an econometric model is estimated using panel data for the 28 European Union countries between 1990 and 2014. The econometric model include three dummy variables to measure the effectiveness of the three phases of the EU-ETS commerce in reducing emissions. Furthermore, we analyse how effective the phases are when renewables energies are included in the analysis. The results show that the EU-ETS is effective to reduce emissions and each phase has a greater impact on the reduction. Nevertheless, the system should be more flexible to adapt to the fluctuations in the demand for rights.

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“…Second, a small number of recent papers examines the idea of introducing a quantity-based adjustment mechanism to the EU ETS (Fell, 2015;Schopp et al, 2015;Kollenberg & Taschini, 2015;Ellerman et al, 2015;Perino & Willner, 2015). The so-called "Market Stability Reserve (MSR)"-to be introduced in Phase 4 of the EU ETSaims at rectifying the structural problem of allowances surplus by creating a mechanism according to which annual auction volumes are adjusted in situations where the total number of allowances in circulation is outside a certain predefined range (EC, 2014).…”

Section: Introductionmentioning

confidence: 99%

Combining Price and Quantity Controls Under Partitioned Environmental Regulation

Abrell

2016

SSRN Journal

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Change combines cutting-edge scientific research with independent policy analysis to provide a solid foundation for the public and private decisions needed to mitigate and adapt to unavoidable global environmental changes. Being data-driven, the Joint Program uses extensive Earth system and economic data and models to produce quantitative analysis and predictions of the risks of climate change and the challenges of limiting human influence on the environmentessential knowledge for the international dialogue toward a global response to climate change.To this end, the Joint Program brings together an interdisciplinary group from two established MIT research centers: the Center for Global Change Science (CGCS) and the Center for Energy and Environmental Policy Research (CEEPR). These two centers-along with collaborators from the Marine Biology Laboratory (MBL) at Woods Hole and short-and long-term visitors-provide the united vision needed to solve global challenges.At the heart of much of the program's work lies MIT's Integrated Global System Model. Through this integrated model, the program seeks to discover new interactions among natural and human climate system components; objectively assess uncertainty in economic and climate projections; critically and quantitatively analyze environmental management and policy proposals; understand complex connections among the many forces that will shape our future; and improve methods to model, monitor and verify greenhouse gas emissions and climatic impacts.This reprint is intended to communicate research results and improve public understanding of global environment and energy challenges, thereby contributing to informed debate about climate change and the economic and social implications of policy alternatives. Abstract: This paper analyzes hybrid emissions trading systems (ETS) under partitioned environmental regulation when firms' abatement costs and future emissions are uncertain. We show that hybrid policies that introduce bounds on the price or the quantity of abatement provide a way to hedge against differences in marginal abatement costs across partitions. Price bounds are more efficient than abatement bounds as they also use information on firms' abatement technologies while abatement bounds can only address emissions uncertainty. Using a numerical stochastic optimization model with equilibrium constraints for the European carbon market, we find that introducing hybrid policies in EU ETS reduces expected excess abatement costs of achieving targeted emissions reductions under EU climate policy by up to 89 percent. We also find that under partitioned regulation there is a high likelihood for hybrid policies to yield sizeable ex-post cost reductions. -Ronald G. Prinn and John M. Reilly, Joint Program Co-Directors MIT Joint Program on the Science and Policy of Global Change

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An Analysis of Allowance Banking in the EU ETS

Cited by 17 publications

References 11 publications

Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms’ competitiveness? Empirical findings from the literature

Why does emissions trading under the EU Emissions Trading System (ETS) not affect firms’ competitiveness? Empirical findings from the literature

Institutional Change and Environment: Lessons from the European Emission Trading System

Combining Price and Quantity Controls Under Partitioned Environmental Regulation

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