AMBIO

, Volume 41, Supplement 1, pp 23–32 | Cite as

Short-Run Allocation of Emissions Allowances and Long-Term Goals for Climate Policy

  • Lars Zetterberg
  • Markus Wråke
  • Thomas Sterner
  • Carolyn Fischer
  • Dallas Burtraw
Article

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.

Keywords

Benchmarking Emissions trading Allocation of allowances EU ETS 

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Copyright information

© Royal Swedish Academy of Sciences 2012

Authors and Affiliations

  • Lars Zetterberg
    • 1
  • Markus Wråke
    • 2
  • Thomas Sterner
    • 4
  • Carolyn Fischer
    • 3
  • Dallas Burtraw
    • 3
  1. 1.IVL Swedish Environmental Research InstituteStockholmSweden
  2. 2.International Energy AgencyParisFrance
  3. 3.Resources for the FutureWashingtonUSA
  4. 4.Department of EconomicsUniversity of GothenburgGothenburgSweden

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