Emission Permits Allocation, Market
Power and Cost-effectiveness of ETS
- A Theoretical Analysis
Mei Wang
Advisor
Prof. Peng Zhou
College of Economics and Management, NUAA
Research Centre for Soft Energy Science, NUAA
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Introduction
Emission trading system (ETS) has become an important
policy instrument in response to climate change.
ETS
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Introduction
Many countries/regions have gradually launched their ETS since 2005.
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深圳
上海
北京
广东
天津
湖北
重庆
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Introduction
Market power
In EU ETS,
carbon price in the first period experienced
high fluctuation and fell to 0 at the end of
2007.
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120
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Over allocation
80
60
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In China pilot ETS,
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0
wild fluctuation in the
carbon price.
(4.2-123 Yuan/ton)
Introduction
The presence of market power in the carbon market can lead to
efficiency loss in ETS which is dependent on initial allocation of
permits.
Market power exists only in the
carbon market
Market power in the carbon
market and production market
• Hahn (1984)
• Misiolek and Elder (1989)
• Westskog (1996)
• Sartzetakis (1997)
• Malik (2002)
• Eshel (2005)
• Liski and Montero (2005)
• Hintermann (2011)
• Maeda (2003)
• Hatcher (2012)
• Hintermann (2017)
• Tanaka and chen (2012)
• …
• …
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Introduction
Fairness
Efficiency
Emission allocation is an important part in ETS.
Theoretical study
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Number of Studies
• Indicator approach
• Optimization approach
• Game theoretic
approach
• Hybrid approach
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25
20
15
10
Real-world application
• Grandfathering
• Benchmarking
• Auctioning
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0
1990-1994
1995-1999
2000-2004
2005-2009
2010-2015
Introduction
The main purpose of this paper is
• to analyze the impact of CO2 emission permits allocation method on
the cost-effectiveness of ETS from the perspective of market power
• to choose most suitable allocation method when market power exists
in ETS.
College of Economics and Management, NUAA
Research Centre for Soft Energy Science, NUAA
7
CO2 emission permit allocation methods
Grandfathering
Benchmarking
Grandfathering
Auctioning
Benchmarking
Auctioning
Mixed allocation
College of Economics and Management, NUAA
Research Centre for Soft Energy Science, NUAA
Stackelberg model in ETS
Price takers solve the following optimization problem
Minimize
(i = 2, …, n)
Dominant firm solves the following optimization problem
Minimize
Subject to
College of Economics and Management, NUAA
Research Centre for Soft Energy Science, NUAA
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Stackelberg model in ETS
Grandfathering
The carbon price is dependent on initial
allocation of emission permits of
dominant firm.
The inefficiency in abatement relies on
the net volume of emission permits
traded by firm 1.
College of Economics and Management, NUAA
Research Centre for Soft Energy Science, NUAA
10
Stackelberg model in ETS
Benchmarking
The carbon price is dependent on the
value of the benchmark the
government sets for the firm with
market power.
Benchmarking rule can easily result
in market distortion when market
power exists in carbon market.
College of Economics and Management, NUAA
Research Centre for Soft Energy Science, NUAA
11
Stackelberg model in ETS
Auctioning 1
Firm 1 has the market power to set carbon price
Firm 1 sets the carbon price lower than its
marginal abatement cost.
The cost-effectiveness of ETS cannot be reached
and inefficiency is dependent on the net volume
of emission permits traded by firm 1.
Auctioning 2
The carbon price is set firstly by the government
All the firms are carbon price takers.
Under auctioning, the cost-efficiency in carbon
market can be achieved, given the proper carbon
price set by the government.
College of Economics and Management, NUAA
Research Centre for Soft Energy Science, NUAA
12
Stackelberg model in ETS
Mixed allocation
Grandfathering and Auctioning 1
The carbon price is dependent on initial
allocation of emission permits of
dominant firm.
The inefficiency in abatement relies on
the net volume of emission permits
traded by firm 1.
College of Economics and Management, NUAA
Research Centre for Soft Energy Science, NUAA
13
Discussions and implications
1. Market power and cost-effectiveness of ETS
Market power plays an important role in the cost-effectiveness of
ETS. The firms with market power in the carbon market can deviate
the carbon price from the cost-efficient equilibrium price.
2. Emission permit allocation method and cost-effectiveness of ETS
The cost-effectiveness of ETS is highly affected by emission
allocation method when there exists market power in carbon
market.
College of Economics and Management, NUAA
Research Centre for Soft Energy Science, NUAA
14
Policy suggestions
Grandfathering
rule is a better
choice at the early
stage of ETS.
The auctioning 2 rule
would be suitable
when the ETS is well
developed.
College of Economics and Management, NUAA
Research Centre for Soft Energy Science, NUAA
Thank You!
College of Economics and Management, NUAA
Research Centre for Soft Energy Science, NUAA
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