A Critical Overview
Chapter 5: Implementation issue 1: Initial allocation of emission rights
Before starting emissions trading, an emissions target has to be set. This can be formulated in terms of an absolute emissions cap or in terms of a relative emissions target (expressed, for example, per tonne of CO2 per unit of output or per unit of GDP). In order to reduce emissions, this cap or relative target must be more stringent than current emission levels, otherwise the regulation will not 'bite'. The next step is to determine the way in which emission rights will be allocated. Emitters either obtain these rights for free or they have to buy them from the government (for example, at auction). ETS designers could also opt for a combination of measures to bring allowances onto the market. Within these categories of free or paid allocation various options can be used to bring allowances onto the market. Standard forms of free allocation employed by emissions trading systems are grandfathering and benchmarking. Grandfathering refers to the allocation of emission allowances on the basis of historical emissions. Benchmarking refers to an allocation based on production technology standards. As a standard form of paid allocation, auctions are commonly used. Other forms of paid allocation (such as the sale of allowances to a specific section of society) are theoretically possible, but are not employed in practice in the context of the initial allocation of allowances.
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