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The allowance allocation under the European emission trading schemes differs fundamentally from earlier cap-and-trade programmes, such as SO 2 and NO x in the USA. Because of the sequential nature of negotiations of the overall budget, the allocation also has to follow a sequential process. If power generators anticipate that their current behaviour will affect future allowance allocation, then this can distort today's decisions. Furthermore, the national allocation plans (NAPs) contain multiple provisions dealing with existing installations, what happens to their allocation when they close, and allocations to new entrants. We provide a framework to assess the economic incentives and distortions that provisions in NAPs can have on market prices, operation and investment decisions. To this end, we use both analytic models to illustrate the effects of the incentives, and results from numerical simulation runs that estimate the magnitude of impacts from different allocation rules.

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This paper critically reviews the literature on embodied carbon in trade and evaluates our present empirical understanding of these flows. A careful comparison of quantitative results from this literature exposes significant inconsistencies. For instance, estimates for emission embodied in world trade in 2004 range between 4.4 Gt and 6.2 Gt CO2, the difference corresponding to around half of Europe's annual emissions. A few consistent themes do nevertheless emerge from the literature. Most importantly, emissions in trade constitute a large and growing share of global emissions. Uncertainty about country‐level embodied emissions remains large, however, which presents severe limitations for the practical application of embodied carbon principles in climate policy.

As many countries, regions, cities, and states implement emissions trading policies to limit CO2 emissions, they turn to the European Union's experience with its emissions trading scheme since 2005. As a prominent example of a regional carbon pricing policy, it has attracted significant attention from scholars interested in evaluating the effectiveness and impacts of emissions trading. Among the key difficulties faced by researchers is isolating the effect of the EU ETS on industry operation, investment, and pricing decisions from other dominant factors such as the financial crisis, and establishing credible counterfactual scenarios against this backdrop. This article reviews the evidence, focusing on two intended effects (emissions abatement and investment in low‐carbon technologies) as well as two side‐effects (profits and price impacts). We find that the EU ETS cut CO2 emissions by 40–80 million t/year on average, or 2–4% of the total capped, while the evidence on innovation and investment impacts is inconclusive. There is strong empirical support for cost‐pass through in electricity (20–100%), in diesel and gasoline (>50%), and some preliminary evidence of pricing power in other industrial sectors. Windfall profits have amounted to billions of Euros, and concentrated in a few large companies. This article is categorized under: Climate Economics > Economics of Mitigation The Carbon Economy and Climate Mitigation > Policies, Instruments, Lifestyles, Behavior Policy and Governance > Multilevel and Transnational Climate Change Governance