Price and Welfare Effects of Emission Quota Allocation
51 Pages Posted: 28 Oct 2011 Last revised: 1 Nov 2011
Date Written: October 26, 2011
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
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