Pros and Cons of Auctioning Emission Rights: A Law and Economics Perspective

22 Pages Posted: 28 Apr 2010

See all articles by Edwin Woerdman

Edwin Woerdman

University of Groningen - Faculty of Law

Stefan E. Weishaar

Maastricht University - METRO Institute; University of Groningen - Faculty of Law

Date Written: February 1, 2010

Abstract

In this paper we analyze the extent to which the increased role of allowance auctions after 2012 will influence the effectiveness, efficiency and equity of the Emissions Trading Scheme in the European Union (EU ETS). We argue that more auctioning affects neither the effectiveness nor the efficiency of the EU ETS, but that it does affect the equity (or: fairness) of the scheme. First, effectiveness is determined by the emission caps, not by the way the allowances under these caps are allocated. Second, efficiency results from the tradability of the allowances and, more fundamentally, from the internalization of climate damage in the form of a carbon price, not from the allowance allocation method. Third, equity is in fact influenced by the way in which the allowances are allocated. For consumers, the scheme will be fairer after 2012 because more auctioning reduces the windfall profits of producers. For producers, however, the fairness of the scheme will decline because they will lose the wealth transfer of free allowances that made them accept the EU ETS in the first place.

Keywords: EU, emissions trading, auctioning, effectiveness, efficiency, equity

JEL Classification: D63, H23, K32, L51, Q48

Suggested Citation

Woerdman, Edwin and Weishaar, Stefan E., Pros and Cons of Auctioning Emission Rights: A Law and Economics Perspective (February 1, 2010). Maastricht Faculty of Law Working Paper No. 2010-1. Available at SSRN: https://ssrn.com/abstract=1596682 or http://dx.doi.org/10.2139/ssrn.1596682

Edwin Woerdman (Contact Author)

University of Groningen - Faculty of Law ( email )

9700 AS Groningen
Netherlands
+31 50 363 5736 (Phone)
+31 50 363 7101 (Fax)

Stefan E. Weishaar

Maastricht University - METRO Institute ( email )

PO Box 616
Maastricht, 6200 MD
Netherlands

University of Groningen - Faculty of Law ( email )

9700 AS Groningen
Netherlands

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