European Emissions Trading in Practice
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European Emissions Trading in Practice

An Economic Analysis

Stefano Clò

This unique and up-to-date book analyses the functioning of the European Emissions Trading Scheme (ETS) and assesses the extent to which relevant legislation has affected its capacity to promote cost-effective reduction of European carbon emissions.
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Chapter 6: Analysis of the Allocation Rules: Do Polluters Pay under Grandfathering?

Stefano Clò


1. INTRODUCTION To create political acceptability, grandfathering has been used as the primary method to allocate the allowances. This means that polluters have received most emission rights free of charge primarily based on their historical emissions. As a result, they did not have to buy rights in an auction. As stated in art. 10 of Directive 2003/87/EC, every EU MS was required to allocate at least 95 per cent of the allowances free of charge for the threeyear period 2005–2007 and at least 90 per cent of the allowances free of charge for the five-year period 2008–2012. After the ETS was launched, different studies have shown empirically that in different regions the power sector has incorporated part of the value of free allocated emissions allowances into the price of electricity. For instance, Sjim et al. estimated a rate of CO2 price pass-through into wholesale electricity price, which has varied between 60 and 100 per cent in Germany and in the Netherlands.1 Honkatukia et al. found empirically that in 2005, on average, 75 to 95 per cent of the variation of the price of emissions allowances was transferred to the Finnish Nord Pool day-ahead prices. The possibility that producers generate so-called windfall profits by passing through the market value of the allowances that they receive for free into the final product price raises the general argument that ‘grandfathering of allowances creates a government subsidy of polluters’. Under this perspective, the fact that consumers pay for what producers receive for...

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