EU studies emission trading allocation methods
The European Commission has published a comprehensive overview of allocation methods used to distribute pollution allowances in emission trading systems. Completed by consultants for the environment directorate, the study sets out the pros and cons of different methods. Auctioning emerges as marginally preferable in terms of economic impact.
EU governments are currently debating how to create the bloc\'s first emission trading scheme - for carbon dioxide releases (ED 13/12/01). The choice of allocation method promises to be one of the most difficult issues to settle, because of the potential for market distortion and the major sums involved. The report\'s authors estimate that euros 30bn worth of allowances will be distributed annually through the scheme.
Under Commission proposals, for the scheme\'s first three years member states would distribute allowances as they pleased - with the sole proviso that they be granted for free (ED 23/10/01).
By 2008 the Commission would develop a harmonised EU allocation method. No indications of a preference have yet emerged, but consultations have shown that governments are leaning towards auctioning while businesses generally favour grandfathering (ED 31/01/01).
An official said today that the study was intended to help national authorities distribute allowances during the trading scheme\'s first three years. In the long term it will also inform the Commission\'s choice of harmonised allocation method.
However, the European Parliament\'s rapporteur on emissions trading, Jorge Moreira da Silva, is set to propose much stronger common EU rules on allocating permits well ahead of 2008 (ED 21/02/02). If this idea gains enough support it could mean the Commission having to propose an allocation method much earlier.
Consultants Nera compared the consequences of auctioning with various types of grandfathering and a third method, \"updating\". They classed the findings in two categories - impact on overall efficiency of the trading system, and impact on particular sectors.
Both auctioning and grandfathering provide the best incentives to minimise costs, the survey found. The choice of auctioning or grandfathering would not affect product markets, while the two methods have similarly neutral effects on market distortion. Updating is the least efficient of the three.
Auctioning is \"likely to harm participating sectors\" and produces stranded costs for producers, unless revenues are recycled to them. But it comes out as slightly preferable to grandfathering because it is better able to reward companies taking early action to reduce emissions and has much lower impacts on consumers and taxpayers. However, the authors point out that there have been virtually no examples of auctioning in practice.
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