Incentives for energy efficiency in the EU Emissions Trading Scheme
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This paper explores the incentives for energy efficiency induced by the European Union Emissions Trading Scheme (EU ETS) for installations in the energy and industry sectors. Our analysis of the National Allocation Plans for 27 EU Member States for phase 2 of the EU ETS (2008–2012) suggests that the price and cost effects for improvements in carbon and energy efficiency in the energy and industry sectors will be stronger than in phase 1 (2005–2007), but only because the European Commission has substantially reduced the number of allowances to be allocated by the Member States. To the extent that companies from these sectors (notably power producers) pass through the extra costs for carbon, higher prices for allowances translate into stronger incentives for the demand-side energy efficiency. With the cuts in allocation to energy and industry sectors, these will be forced to greater reductions; thus, the non-ET sectors like household, tertiary, and transport will have to reduce less, which is more in line with the cost-efficient share of emission reductions. The findings also imply that domestic efficiency improvements in the energy and industry sectors may remain limited since companies can make substantial use of credits from the Kyoto Mechanisms. The analysis of the rules for existing installations, new projects, and closures suggests that incentives for energy efficiency are higher in phase 2 than in phase 1 because of the increased application of benchmarking to new and existing installations and because a lower share of allowances will be allocated for free. Nevertheless, there is still ample scope to further improve the EU ETS so that the full potential for energy efficiency can be realized.
KeywordsClimate policy Emission trading Energy efficiency Innovation
best available technology
combined gas cycle turbines
clean development mechanism
combined heat and power
community independent transaction log
European Union allowance
- EU ETS
EU Emissions Trading Scheme
Kyoto Mechanisms (i.e. JI, CDM)
National Allocation Plan
verified emissions table
The authors would like to thank four anonymous referees for their valuable comments on earlier drafts of this paper. Participants at the European Council for Energy-Efficient Economy Summer Study 2007 in La Colle sur Loup, France, also provided helpful suggestions. Research assistance by Johanna Cludius, Christian Möhrmann, Jakob Rager, Manuel Strauch, and Saskia Ziemann is also acknowledged, as well as proofreading by Gillian Bowman-Koehler and Rob Passey. Parts of this research were sponsored by the Volkswagen Foundation.
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