'Windfall Profits 2.0' During the Third Phase of the EU-ETS

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractThe first two phases of the EU-ETS were characterized by a profit increase, which was primarily due to free allowances given through grandfathering. To avoid these windfall profits and to decrease leakage, two major modifications have been implemented for the third phase: electric companies no longer receive free allowances, while energy intensive and trade exposed sectors are granted free allowances that are calculated based on firm production capacity. This paper theoretically shows a new type of profit increase in sectors that are not exposed to international competition. This paper also illustrates the profit increase for the third phase of the EU-ETS and shows that profits in the electricity sector may increase by approximately 2% when free allowances are given to the other sectors.

Emission reduction and profit-neutral permit allocations

“…In that case, the cleaner a technology is, the higher will be its marginal cost. As in Nicolai & Zamorano (2014) [16], assume that the unit cost of production and abatement for a firm i is equal to:…”

“…Finally, extending the analysis to a market for permits covering several sectors, the paper assesses how different sectors are altered by the implementation of pollution permits. This is the first study in the literature, except Nicolai & Zamorano (2014) [16], to consider both several sectors and a percentage of reduction instead of fixing a pollution cap. It is found that the distribution of the emission reductions between sectors depends on the relative magnitude of both elasticities of demand and the ratios of marginal cost over emission intensity.…”

Emission Reduction and Profit-Neutral Permit Allocations

“…16 The cost parameter for abatement is determined by the inverse of the pollution factor solution, i.e., we fix γ according to the values observed from f The cement sector is the sector that proportionately reduces the output most while steel is the one that abates the most. Indeed, the lowest the cost over emission intensity ratio is that of cement while the three elasticities are quite close to each other.…”

“…This is the first study in the literature, except Nicolai & Zamorano (2014) [16], to consider both 5 several sectors and a percentage of reduction instead of fixing a pollution cap. It is found that the distribution of the emission reductions between sectors depends on the relative magnitude of both elasticities of demand and the ratios of marginal cost over emission intensity.…”

“…In that case, the cleaner a technology is, the higher will be its marginal cost. As in Nicolai & Zamorano (2014) [16], assume that the unit cost of production and abatement for a firm i is equal to:…”