Abstract
We use economic analysis to evaluate grandfathering, auctioning, and benchmarking approaches for allocation of emissions allowances and then discuss practical experience from European and American schemes. In principle, auctions are superior from the viewpoints of efficiency, fairness, transparency, and simplicity. In practice, auctions have been opposed by important sectors of industry, which argue that carbon pricing without compensation would harm international competitiveness. In the European Union’s Emissions Trading System, this concern led to grandfathering that is updated at various intervals. Unfortunately, updating gives industry an incentive to change behavior to influence future allocation. Furthermore, the wealth transferred to incumbent firms can be significantly larger than the extra costs incurred, leading to windfall profits. Meanwhile, potential auction revenues are not available to reduce other taxes. By circumscribing free allocation, benchmarking can target competitiveness concerns, incur less wealth transfer, and provide a strategy consistent with transitioning to auctions in the long run.
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Notes
See, for example, EUROFER position paper on ETS, October 2008, www.eurofer.org/index.php/eng/content/pdf/776; and the Cembureau position paper, Climate Change: CO2 Emissions Trading—Points of Convergence within the Cement Industry, www.cembureau.be/Cem_warehouse/POINTS%20OF%20CONVERGENCE%20WITHIN%20THE%20CEMENT%20INDUSTRY.PDF (both accessed May 2009).
For a detailed analysis of this in a U.S. context, see Burtraw et al. (2001).
Based on a series of seminars with representatives from EU industry, business associations, and nongovernmental organizations, Egenhofer and Georgiev (2010) summarize stakeholder views on the advantages of benchmarking over grandfathering. These arguments include “incentivizing emissions reductions; allow[ing] for updating without introducing perverse incentives; ensuring a non-distorted carbon price.”
For a more extensive discussion of this and other contentious issues, see Wråke et al. (2012 [this issue]).
At least 60% auctioning in 2012, with a target of reaching 70% auctioning in 2020.
This includes 52 products in 21 sectors, representing some 80% of free allocations.
After a significant change in political leadership, the state of New Jersey has decided to withdraw from the group in 2012.
Sources outside the trading program are included in the 2020 target.
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The authors would like to thank the Mistra foundation for financial support through the research program CLIPORE and two anonymous reviewers for thorough reading and accurate comments.
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Zetterberg, L., Wråke, M., Sterner, T. et al. Short-Run Allocation of Emissions Allowances and Long-Term Goals for Climate Policy. Ambio 41 (Suppl 1), 23–32 (2012). https://doi.org/10.1007/s13280-011-0238-1
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DOI: https://doi.org/10.1007/s13280-011-0238-1