Price and Welfare Effects of Emission Quota Allocation

Rosendahl, Knut Einar; Golombek, Rolf; Kittelsen, Sverre A.C.

doi:10.2139/ssrn.1949952

Price and Welfare Effects of Emission Quota Allocation

USAEE Working Paper No. 11-086

51 Pages Posted: 28 Oct 2011 Last revised: 1 Nov 2011

See all articles by Knut Einar Rosendahl

Knut Einar Rosendahl

Norwegian University of Life Sciences; Statistics Norway - Research Department

Sverre A.C. Kittelsen

Frisch Centre

Date Written: October 26, 2011

Abstract

We analyze how different ways of allocating emission quotas may influence the electricity market. Using a large-scale numerical model of the Western European energy market, we show that different allocation mechanisms can have very different effects on the electricity market, even if the total emission target is fixed. This is particularly the case if output-based allocation (OBA) of quotas is used. Gas power production is then substantially higher than if quotas are grandfathered. Moreover, the welfare costs of attaining a fixed emission target are significantly higher. The numerical results for OBA are supported by theoretical analysis, with some new results.

Keywords: Quota Market, Electricity Market, Allocation of Quotas

JEL Classification: D61, H23, Q41, Q58

Suggested Citation: Suggested Citation

Rosendahl, Knut Einar and Golombek, Rolf and Kittelsen, Sverre A.C., Price and Welfare Effects of Emission Quota Allocation (October 26, 2011). USAEE Working Paper No. 11-086. Available at SSRN: https://ssrn.com/abstract=1949952 or http://dx.doi.org/10.2139/ssrn.1949952