Abstract
The object of this paper is to place allocation mechanisms into a framework of Emission Trading Systems and thereby to establish a typology. It analyses how various assignment mechanisms deal with issues such as price determination, allocative efficiency and environmental considerations in a static and dynamic economy model. It analyses how allocation mechanisms are to be ranked and whether they serve the attainment of the general equilibrium. First the paper examines how market-based allocation mechanisms (auctions) perform in light of the above issues. Second the paper distinguishes between the two types of administrative allocation mechanisms: (1) financial administrative allocation mechanisms, combining payment schemes with bureaucratic expertise, and (2) free administrative allocation mechanisms, based inter alia on industrial policy considerations and on passed emission records (grandfathering). In particular, the value added of relative performance standards, which are for example included in the “Performance Standard Rate” (PSR) Emission Trading System, are examined as a means to provide allowances. The overall finding is that in a closed static economy and in the presence of an efficient trading market, different allocation methods produce equally efficient outcomes in allocative and environmental respects. With regard to an open dynamic economy, the impact of initial allocation mechanisms resembles those of a static closed economy. In such an economy the upper limit to the internalisation of negative externalities is given by operator’s costs of environmentally harmful relocation and hence the cost burden placed upon operators is crucial. Auctions and financial administrative allocation mechanisms perform less well than free administrative mechanisms. Relative standard base mechanisms, constituting an important element of the PSR Emission Trading System, perform better than grandfathering schemes because they take into account abatement possibilities of industries, minimise stranded costs and do not give rise to time shifting of abatement projects. It is therefore concluded that allocation mechanisms merit more attention than the discussion relating to capped trade and trade without a cap.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
2001/81/EC Directive of the European Parliament and of the Council of 23 October 2001 on national emission ceilings for certain atmospheric pollutants.
2003/87/EC Directive of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC (Text with EEA relevance).
Alanen, L. (2003). The impact of environmental cost internalization on sectoral competitiveness: A new conceptual framework. In H. Singer, N. Fatti, & Tandon, R. (Eds.), Trade and environment, recent controversies, new world order series, Vol. 21, Part III (pp. 1111–1150).
Ashenfelter, O. (1989). How auctions work for wine and art. The Journal of Economic Perspectives, 3(3), 23–36.
Ashenfelter, O., & Graddy, K. (2002). Art auctions: A survey of empirical studies. NBER Working Paper Series, Working Paper No. 8997, pp. 2–43.
Ausubel, L. (2002). An efficient ascending-bid auction for multiple objects. University of Maryland Working Paper, Working Paper 97-06, revised August 2002, pp. 1–25.
Ausubel, L., & Cramton, P. (2002). Demand reduction and inefficiency in multi-unit auctions. University of Maryland, 12th July 2002, pp. 1–30.
Ausubel, L., & Schwartz, J. (1999). The ascending auction paradox. University of Maryland, 5th July 1999, pp. 1–23.
Ballard, C., Shoven, J., & Whalley, J. (1985). General equilibrium computations of the marginal welfare costs of taxes in the United States. American Economic Review, 75, 128–138.
Becker, G. S. (1968). Crime and punishment: An economic approach. The Journal of Political Economy, 76(2), 169–217.
Börgers, T., & Van Damme, E. (2004). Auction theory for auction design. In M. C. W. Janssen (Ed.), Auctioning public assets, analysis and alternatives (pp. 19–63). Cambridge University Press.
Böringer, C., & Welsch, H. (2004). Contracting and convergence of carbon emissions: an intertemporal multi-region CGE analysis. Journal of Policy Modeling, 26, 21–39.
Bovenberg, A., & Goulder, L. (2000). Neutralizing the adverse industry impacts of CO 2 abatement policies: What does it cost? NEBR Working Paper Series, No. 7654, p. 34.
Brusco, S., & Lopomo, G. (1999). Collusion via signalling in open ascending auctions with multiple objects and complementarities. New York University Leonard N. Stern School of Business Department of Economics Working Paper Series, Working Paper 99-05, pp. 1–27.
Burniaux, J.-M., & Oliveira Martins, J. (2000). Carbon emission leakages: A general equilitrium view. OECD, Economics Department Working Papers No. 242, p. 32.
Caillaud, B., & Jehiel, P. (1998). Collusion in auctions with externalities. The RAND Journal of Economics, 29(4), 680–702.
Coase, R. H. (1960). The problem of social cost. Journal of Law and Economics, 3, 1–44.
Council Decision 2002/358/CE. Official Journal of the European Communities, L130/1 of 15.05.2002.
Cramton, P., & Kerr, S. (1999). Tradeable carbon permit auctions, how and why to auction not grandfather. Wharton, Financial Institutions Center, Implications of Auction Theory for New Issues Markets, No. 02-19, pp. 1–19.
Cramton, P., & Schwartz, J. (2002). Collusive bidding in the FCC spectrum auctions. Contributions to Economic Analysis & Policy, 1(1) Article 11, 1–20.
Cullis, J., & Jones, P. (1998). Public finance and public choice (2nd ed.). Oxford University Press, 422 pp.
Cyprus (2004). National allocation plan, submission of October 2004, http://www.europa.eu.int/comm/environment/climat/pdf/cyprus_nap_en.pdf, viewed on 04.02.2005.
Dales, J. H. (1968). Pollution, property & prices. University of Toronto Press, reprinted in 1975, 111 pp.
EC Treaty.
Edmonds, J., Wise, M., & Barns, D. W. (1995). Carbon coalitions: The cost and effectiveness of energy agreements to alter trajectories of atmospheric carbon dioxide emissions. Energy Policy, 23(4/5), 309–335.
EC Treaty (1993). Consolidated Version of the Treaty Establishing the European Community, as amended in accordance with the Treaty of Nice Consolidated Version (OJ 2002 C 325/1-184) and the 2003 Accession Treaty (OJ 2003 L236/17).
Ethier, W. J. (2002). Globalization: Trade, technology and wages. International trade and factor mobility, PIER Working Paper 02-031, p. 34.
European Commission (2003). Steunmaatregelen van de Staten N 35/2003 – Nederland Systeem van verhandelbare emissierechten voor Nox, C(2003)1761fin, 24.06.2003, p. 13.
European Commission (2004). EU emissions trading. An open scheme promoting global innovation to combat climate change, p. 24. Available at http://ec.europa.eu/environment/climat/pdf/emissions_ trading_en_pdf.
Faure, M., & Skogh, G. (2003). The economic analysis of environmental policy and law, an introduction. Edward Elgar Publishing, 354 pp.
Frank, R. (1997). Microeconomics and behaviour (3rd ed.). Boston: Irwin Mc Graw-Hill, 744 pp.
Gayer, T. (2005). Auctioning pollution rights. American Enterprise Institute for Public Policy Research, AEI Print Index No. 17877, http://www.aei.org/news21838/, viewed on 26.01.2005.
Gielen, A. M., Koutstaal, P. R., & Vollebergh, H. R. (2002). Comparing emission trading with absolute and relative targets. Paper presented at the 2nd CATEP Workshop on the Design and Integration of National Tradable Permit Schemes for Environmental Protection, hosted by University College London, 25–26 March 2002, available at http://www.ucd.ie/envinst/envstud/CATEP%20Webpage/Papers/Koustaal.pdf.
Grimm, V., Riedel, F., & Wolfstetter, E. (2001). Low price equilibrium in multi-unit auctions: The GSM spectrum auction in Germany (pp. 1–14). Institut für Wirtschaftstheorie I, Humboldt Universität zu Berlin.
Harrision, D., & Radov, D. (2002). Evaluation of alternative initial allocation mechanisms in a European Union greenhouse gas emissions allowance trading scheme. NERA, 168 pp.
Helm, C. (2003). International emissions trading with endogenous allowance choices. Journal of Public Economics, 87, 2737–2747.
Jones, R. W., & Kierzkowski, H. (2001). A framework for fragmentation. In S. W. Arndt & K. Kierzkowski (Eds.), Fragmentation: New production patterns in the world economy. Oxford: Oxford University Press.
Kagel, J. H., & Levin, D. (2001). Behavior in multi-unit demand auctions: experiments with uniform price and dynamic vickrey auctions. Econometrica, 69(2), 413–454.
Kerr, S., & Newell, G. (2003) Policy-induced technology adoption: Evidence form the U.S. lead phasedown. The Journal of Industrial Economics, LI(3), 317–343.
Krishna, V. (2002). Auction theory. San Diego: Academic Press, 303 pp.
Kruger, J., & Pizer, W. A. (2004). The EU emissions trading directive: Opportunities and potential pitfalls. Resources for the Future, Discussion Paper 04 24, April 2004, pp. 1–59.
Krugman, P., & Obstfeld, M. (1997). International economics, theory and policy (4th ed.). Addison Wesley, 766 pp.
Kyoto Protocol to the United Nations Framework Convention on Climate Change. United Nations, 1998, available at http://unfccc.int/resource/docs/convkp/kpeng.pdf
Lecocq, R., & Crassous, R., (2003). International climate regime beyond 2012, are quota allocation rules robust to uncertainty. Policy Research Working Paper, No. 3000, The World Bank Development Research Group, Infrastructure and Environment, March 2003, pp. 1–39.
Maeda, A. (2003). The emergence of market power in emission rights markets: The role of initial permit distribution. Journal of Regulatory Economics, 24(3), 293–314.
Malta (2004). National allocation plan, submission of 18 October 2004, http://www.europa.eu.int/comm/environment/climat/pdf/malta.pdf, viewed on 04.02.2005.
Manelli, A. M., Sefton, M., & Wilner, B. S. (1999). Multi-unit auctions: A comparison of strategic and dynamic mechanisms. pp. 1–20. Available at http://wpcarey.asu.edu/tools/mytools/pubs_admin/FILES/wp99_9.pdf
Martin, S. (1994). Industrial economics, economic analysis and public policy (2nd ed.). Prentice Hall, 623 pp.
McAfee, R., & McMillan, J. (1987). Auctions and bidding. Journal of Economic Literature, 25, 699–738.
McAfee, R., & Vincent, D. (1993). The declining price anomaly. Journal of Economic Theory, 60, 191–212.
Milgrom, P. (2004). Putting auction theory to work. Cambridge University Press, 368 pp.
Munskgaard, J., & Pedersen, K. (2001). CO2 accounts for open economies: Producer or consumer responsibility. Energy Policy, 29(4), 327–334.
Neugebauer, T., & Pezanis-Christou, P. (2005). Bidding behavior at sequential first-price auctions with(out) supply uncertainty: A laboratory analysis. January 13, 2005, 23 pp. Republished in Journal of Economic Behavior & Organization, 63(1), 55–72, (2007).
OECD (1974). Recommendation of the council on the implementation of the polluter-pays principle, 14 November 1974 – C(74)223. http://www.webdomino1.oecd.org/horizontal/oecdacts.nsf/Display/9DFDD7AF6065709CC1256FA3004D0413?OpenDocument viewed on 04.02.2005.
Parry, I., Williams, R., III, & Goulder, L. (1999). When can carbon abatement policies increase welfare? The fundamental role of distorted factor markets. Journal of Environmental Economics and Management, 37, 52–84.
Peeters, M. (1993). Towards a European market for tradable pollution permits? Tilburg Foreign Law Review, 2, 117–134.
Pezzy, J. (1992). Analysis of unilateral CO2 control in the European community and OECD. The Energy Journal, 13, 159–171.
Pigou, A. C. (1949). A study in public finance (3rd revised ed.) (first published in 1928). London: Macmillan & Co., 285 pp.
Reinaud, J. (2005). Industrial competitiveness under the European Union Emissions Trading Scheme, International Energy Agency Information Paper, February 2005, 91 pp.
Rothkopf, M., & Harstad, R. (1994). Modeling competitive bidding: A critical essay. Management Science, 40(3), 364–384.
Salmon, T. (2003). Preventing collusion between firms in auctions. Department of Economics (5th February), Florida State University, pp. 1–25.
Shubik, M. (1983). Auctions, bidding, and markets: An historical sketch. In R. Engelbrecht-Wiggans, M. Shubik, & J. Stark (Eds.), Auctions, bidding, and contracting (pp. 33–52). New York: New York University Press.
Smith, S., & Yates, A. (2003). Optimal pollution permit endowments in markets with endogenous emissions. Journal of Environmental Economics and Management, 46, 425–445.
Stavins, R. N. (1997). What can we learn from the grand policy experiment? Positive and normative lessons of the SO2 allowance trading, Journal of Economic Perspectives, 12, 68–88.
Stavins, R. N. (2001). Lessons from the american experiment with market-based environmental policies. Resources for the Future, Discussion Paper 01-53, November 2001, 21 pp.
Stavins, R. N. (2003). Experience with market-based environmental policy instruments. In Karl-Göran Mäler & Jeffrey Vincent (Eds.), Handbook of environmental economics, environmental degradation and institutional responses, Vol. I, Chapter 9 (pp. 355–435). Amsterdam: Elsevier Science.
The Netherlands (2004a). National allocation plan. Submission of 16 April 2004, http://www.novem.nl/default.asp?documentId=114203, viewed on 04.02.2005.
The Netherlands (2004b). Allocatieplan CO2-emissierechten 2005 t/m 2007, Nederlands nationaal toewijzingsplan inzake de toewijzing van broeikasgasemissierechten aan bedrijven, Bijlage E: samenvatting convenanten energie efficiency. http://www.novem.nl/default.asp?documentId=113926 viewed on 08.02.2005, pp. 1–5.
Tietenberg, T. (2002). The tradable permit approach to protecting the commons: What have we learned? FEEM Working Paper 36.2002, pp. 1–40.
Tietenberg, T. (1994). Environmental economics and policy. Harper Collins College Publishers, 432 pp.
Tweede Kamer der Staaten-Generaal, Vergaderjaar 2004–2005, 29766 Nr. 3.
UNEP, UNCTAD (2002). An emerging market for the environment: A Guide to Emissions Trading. United Nations Publication, 41 pp.
Van den Bossche, P. (2005). The law and policy of the world trade organization, text, cases and materials. Cambridge University Press, 865 pp.
Vickrey, W. (1961). Counter-speculation, auctions, and competitive sealed tenders. The Journal of Finance, 16(1), 8–37.
VROM (2003). Erop of eronder, Uitvoeringsnotitie emissieplafonds verzuring en grootschalige luchtverontreining. http://www.vrom.nl/get.asp?file=docs/milieu/uitvoeringsnotitie_emissieplafonds_dec2003pdf.pdf viewed on 08.02.2005, 41 pp.
Weber, R. (1997). Making more from less: Strategic demand reduction in the FCC spectrum auctions. Journal of Economics & Management Strategy, 6(3), 529–548.
Weishaar, S. (2006a). The European CO 2 emissions trading system and state aid: An assessment of the grandfathering allocation method and the performance standard rate system. Metro/Maastricht University, available at http://www.rechten.unimaas.nl/metro.
Weishaar, S. (2006b). The European emission trading system and competition – anticompetitive measures beyond reach? An assessment of the grandfathering allocation method and the performance standard rate system. Metro/Maastricht University, available at http://www.rechten.unimaas.nl/metro.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Open Access This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License ( https://creativecommons.org/licenses/by-nc/2.0 ), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
About this article
Cite this article
Weishaar, S. CO2 emission allowance allocation mechanisms, allocative efficiency and the environment: a static and dynamic perspective. Eur J Law Econ 24, 29–70 (2007). https://doi.org/10.1007/s10657-007-9020-z
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10657-007-9020-z
Keywords
- Allocative efficiency
- Allocation systems
- Emission trading
- CO2
- Environment
- Performance Standard Rate (PSR)
- Grandfathering
- Auction theory