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Please note that corrections may take a couple of weeks to filter through the various RePEc services. Economic literature: papers , articles , software , chapters , books. FRED data. My bibliography Save this article. Allowance allocation matters in China's carbon emissions trading system.

The EU Emissions Trading System - Ecosystem Marketplace

China's national carbon emissions trading system ETS initially started by covering the power generation sector with a rate-based allocation of emission allowances. This single-sector ETS scheme is a tradable performance standard and loosens the participants' emission abatement effort. Given the stringent emission reduction targets implied by China's Nationally Determined Contributions NDCs and the expectation that ETS will cover more sectors in the future, we simulate a national ETS of ten carbon-intensive sectors with mass-based, output-based allocation OBA of emission allowances.

We uncover the impacts and mechanisms of this ETS by comparing the sectoral abatement behaviors across policy scenarios with varying allocation schemes and numbers of benchmarks. We evaluate if the simulated ETS meets important efficiency principles and exhibits desired features. Thus, countries developed "business as usual" baselines based on projected growth in emissions.

Such a projected baseline suffers from two sources of uncertainty: data uncertainties, and forecasting uncertainties. On data, Phase 1 suffered from uncertainties with respect to data collection and coverage, in monitoring methods for historic data, and data verification. On projecting future emissions, Phase 1 faced uncertainties with respect to economic or sector-based growth rates. Fueled in many cases by over-optimistic economic growth assumptions, these uncertainties increased the probability of inflated business as usual baselines.

The combination of these factors and modest reduction requirements resulted in the emissions allocations for the trading period being higher than actua1 emissions. On the positive side, verified emissions in were 3.

Emissions Trading Scheme (ETS) For Dummies

In addition, the allowance prices for stayed persistently high, suggesting some abatement was occurring and raising questions of "windfall" profits. As stated by Ellerman and Buchner:.

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First, and most importantly, the persistently high price for EUAs [EU emissions allowances] in a market characterized by sufficient liquidity and sophisticated players must be considered as creating a presumption of abatement. It would be startling if power companies did not incorporate EUA prices into dispatch decisions that would have shifted generation to less emitting plants. There is plenty of anecdotal evidence that this was the case, and the prominent charges of windfall profits assume that the opportunity cost of freely allocated allowances was being passed on without noting the implications for abatement.

Similarly, it would be surprising if there were no changes in production processes that could be made by the operators of industrial plants. Phase 1 EUAs were basically worthless during the final six months of One consequence of the non-transferability of Phase 1 EUAs is that prices for Phase 2 EUAs remained relatively firm until the recession reduced demand, as indicated by Figure 1.

As further indicated by Figure 1 , during , the market firmed up at a much lower level as participants assessed the impact of the recession on the demand for EUAs. Looking at data for Phase 2 allowances December settlement date indicate prices staying in the range of euro as the European economy slowly recovers from the recession. This is a different response than the market had during Phase 1, and may reflect Phase 2 improvements in the system. In particular, the more predictable response may reflect the ability of the EC to certify Phase 2 NAPs using more verifiable baseline data than were available for Phase 1.

While the environmental performance of Phase 1 may be disputed, the need for additional reductions to achieve Kyoto is not. However, as indicated by the pink line, the EEA projects that the EU existing measures are insufficient to reduce EU emissions to their Kyoto requirements represented by the purple line , resulting in a projected 6. To achieve the Kyoto target the EU projects further reduction actions planned by EU countries represented by the green line in Figure 2 , resulting in an overall reduction of 8. Note: WEM: with existing measures measures implemented or adopted.

WAM: with additional measures planned measures. In addition to domestic emission reductions, the EU has also projected additional reduction credits received by activities permitted under the Kyoto Protocol: 1 purchase of project-based credits by ETS participants and EU governments e.


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  2. ETS in power sector?
  3. Allowance allocation matters in China's carbon emissions trading system!
  4. As indicated in Figure 3 , these activities provide a credit on the EU baseline of 4. Thus, if the EU maintains its current path, it would exceed its Kyoto commitment by about 3. If its planned measures result in the projected 8. Notes: The left section shows the projected emissions considering only domestic measures existing and additional and is showing them as average emissions lines and annual emissions bars.

    The right section shows the projected amount of Kyoto credits accumulated by the end of the commitment period, including the initial EC assigned amount under the Protocol, the purchase of Kyoto project credits by EU ETS participants and EU governments, and carbon sink activities. The EU as a whole does not have an emissions target comparable to the EU bubble.

    Journal of Energy

    By , EU emissions are projected at 9. This reduction is projected at Based on EEA's projections, 24 of the 25 countries with reduction requirements are projected to meet their commitments under the Kyoto Protocol. For the ten of EU member countries with Kyoto obligations, only Slovenia was not in compliance in These numbers will change as individual countries decide to include more facilities under the ETS and as the EC expands ETS coverage to include other sectors and non-CO 2 greenhouse gases.

    These need to be adjusted for three reasons: 1 extensions of ETS scope during phase 2 by Member states; 2 extensions of ETS scope by the EC for third trading period, and 3 the figures do not include inclusion of aviation, nor the emissions from Norway, Iceland, and Liechtenstein—non-EU countries that have linked their programs to the ETS. Set at 2,,, allowances, the cap is subject to further revisions if additional relevant information warrants a change and when a separate decision on allocations to aircraft operators is made. For Phase 3, the EU is re-shaping the ETS to improve its efficiency and eliminate some of the problems identified during Phase 1 and 2.

    However, Phase 2 made little advancement in harmonizing individual countries' allocations schemes. The critical structural change the EU would make in Phase 3 is eliminating National Allocation Plans NAPs , and replacing them with EU-wide rules with respect to allowance availability, allocations, and auctions. These NAPs were assessed by the EC to determine compliance with 12 criteria delineated in an annex to the emissions trading directive. For the second trading period, the NAP had to guarantee Kyoto compliance.

    Report: The EU Emissions Trading System

    This NAP structure will be replaced under Phase 3. There will be one EU-wide cap instead of the 27 national caps under Phase 1 and 2. Allowances will be allocated under EU-wide, fully harmonized rules, including those governing: 1 auctions, 2 transitional free allocations for greenhouse gas intensive, trade-exposed industries, 3 new entrants, and 4 coverage. Under Phases 1 and 2, allowances generally were and are allocated free to participating entities under the ETS.

    The political difficulty in instituting significant auctioning into ETS allowance allocations is the almost universal agreement by covered entities in favor of free allocation of allowances and opposition to auctions. Despite concerns about windfall profits and economic distortions resulting from the free allocation of allowances, there was little change in basic allocation philosophy for Phase 2.

    Most do not include auctions at all. This opposition is mostly overcome for Phase 3 through an EU-wide set of harmonized rules for allowance allocations and auctions. Under Phase 3, the Directive states:. Auctioning should This should also eliminate windfall profits and put new entrants and economies growing faster than average on the same competitive footing as existing installations.

    Corporate response to emissions trading in Lithuania

    The introduction of auction would be differentiated by sector. In general, for the power sector, full auctioning will begin in For electric powerplants, most will receive no free allocation of allowances during Phase 3. However, in a concession to certain eastern European Member States, an optional and temporary derogation from the no-free-allocation requirement for powerplants is provided to countries that meet specific energy and economic criteria. As stated in the Directive:. Because of concern that stringent EU carbon policies may encourage production and related greenhouse gas emissions to shift to countries without carbon policies i.

    Distribution of allowances to be auctioned by the Member States will be determined by a three-part formula Article 10 2. Two percent of the total is distributed to nine former eastern-bloc countries based on the substantial greenhouse gas reductions they have already achieved Annex IIb. In November , the EC finalized an Auction Regulation to provide for coordinated auctions of allowances during Phase 3. While the EC would have preferred to have a single platform, some members insisted on having the option of opting out of the central platform and setting up their own platforms under specified conditions.

    Allowances will be auctioned on a spot basis, avoiding potential conflicts with established secondary markets such as the ECX. The format will be a single-round, sealed bid, uniform price auction.