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Journal of Regulatory Economics

, Volume 46, Issue 3, pp 292–317 | Cite as

Contingent certificate allocation rules and incentives for power plant investment and disinvestment

  • Christoph Weber
  • Philip Vogel
Original Article

Abstract

The electricity generation mix of many countries is strongly dominated by fossil fuelled power plants. \(\hbox {CO}_{2}\) certificate trading is then advocated as a first best instrument for emission abatement in Europe, the US and beyond. An important element of the trading scheme is the initial allocation of allowances. This article is to show how permit allocation rules, applied within an Emission Trading System (ETS), interfere with the long-term pricing and investment on power markets. In particular it is demonstrated that free allocation of certificates contingent on plant availability and fuel used is likely to provide distorting incentives both for continued operation of existing plants and for investments. Consequently, marginal abatement costs within the ETS are increased above efficient levels and new power plant investments may crowd out excessively older power plants. Analytical results are derived for two technology cases and a numerical case study is devoted to the EU 27 power sector.

Keywords

Emission trading Allocation of emission permits Electricity markets Power plant portfolio Mixed complementary program 

JEL Classification

Q54 Q58 Q56 

Notes

Acknowledgments

We thank an anonymous referee and the editor for very helpful comments and suggestions. The usual disclaimer applies.

Supplementary material

11149_2014_9257_MOESM1_ESM.pdf (181 kb)
Supplementary material 1 (pdf 180 KB)

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.University Duisburg-EssenEssenGermany

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