Auctioning of CO₂emission allowances in Phase 3 of the EU Emissions Trading Scheme

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp08081.pdf Zusammenfassung Non-technical SummaryOur paper is motivated by the "Climate action and renewable energy package" proposed by the European Commission in the beginning of 2008. It suggests auctioning as basic principle for allocation for the upcoming third trading phase of the EU Emissions Trading Scheme (Phase 3) that runs from 2013 to 2020. Explicitly, in the power sector 100 % auctioning is proposed from 2013 onwards. In all other sectors it is suggested to start with an initial auctioning share of 20 % in 2013, to be increased to 100 % by 2020. Overall, it is estimated that at least two third of the total quantity of allowances will be auctioned in 2013. The drastic increase of auctioned allowances in contrast to grandfathering in the past will change the market structure in Phase 3. For a given cap, with an augmenting auction supply the possibility to purchase allowances in the secondary market decreases. As a consequence, market liquidity is extracted suggesting a thinner secondary market than in earlier trading phases.Based on the theoretical and empirical literature we firstly emphasize the importance of a properly chosen auction design as the significantly higher auction share, compared to the past and current trading phases, is expected to yield a thin, non-competitive secondary market for CO 2 allowances. Secondly, we elaborate main criteria that a viable auction design is supposed to fulfil and propose a specific auctions design for Phase 3. As criteria we state that the auction should create early and reliable price signals to support correct abatement decisions. The auction should also allocate the allowances to the firms that need them most, i.e. to the firms with the highest marginal abatement costs. Additionally, it should be designed simple and transparent to enhance trust and credibility of the market in the trading scheme and thus enforce intensive participation. Thirdly, we recommend a specific auction design. We argue that the regulator should apply a simultaneous dynamic uniform double auction, in order to achieve best the above mentioned criteria. In this auction firms may both buy and sell allowances. The dynamic implementation ensures that bidders get information over the scarcity of the allowances from the excess demand. Furthermore, all successful bidders pay the same price per allowance. In addition, we conclude that auctioning allowance...

Allocation of Emission Allowances within the European Union Emissions Trading Scheme to the Waste Sector

“…Different kinds of allocation mechanisms are described in the literature. The three most common are: 1) Grandfathering: this uses historical data on emissions as a basis for the future allocation of emission allowances [13,16,28].…”

“…3) Auctioning: under this procedure, instead of direct allocation, emission permits are auctioned according to demand [13,14].…”

“…2) Benchmarking: here, the best available technique is used as the basis for emission allowance allocation [13,14,28].…”

“…Some energy-intensive industries whose competitiveness was judged to be at risk and who are therefore potentially prone to carbon leakage may be exempted [7,[12][13][14][15].…”

“…As various problems arose with this approach, it was decided that from 2013 onwards auctioning would form the basis for allocating allowances. A progressive transition to auctioning is planned, starting with a 20 percent share of allowances distributed in 2013, and reaching full auctioning in 2027 [4,5,[13][14][15]17].…”