'Windfall Profits 2.0' During the Third Phase of the EU-ETS

CERETH Center of Economic Research Working Paper 13/189

26 Pages Posted: 9 Jan 2014 Last revised: 6 Nov 2014

See all articles by Jean Philippe Nicolai

Jean Philippe Nicolai

ETH Zürich

Jorge Zamorano

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES)

Date Written: November 2014

Abstract

The first two phases of the EU-ETS were characterized by a profit increase, which was primarily due to free allowances given through grandfathering. To avoid these windfall profits and to decrease leakage, two major modifications have been implemented for the third phase: electric companies no longer receive free allowances, while energy intensive and trade exposed sectors are granted free allowances that are calculated based on firm production capacity. This paper theoretically shows a new type of profit increase in sectors that are not exposed to international competition. This paper also illustrates the profit increase for the third phase of the EU-ETS and shows that profits in the electricity sector may increase by approximately 2% when free allowances are given to the other sectors.

Keywords: Tradeable permits, Oligopoly markets, Output-based allocation, EU-ETS

JEL Classification: F18, H2, Q5

Suggested Citation

Nicolai, Jean Philippe and Zamorano, Jorge, 'Windfall Profits 2.0' During the Third Phase of the EU-ETS (November 2014). CERETH Center of Economic Research Working Paper 13/189. Available at SSRN: https://ssrn.com/abstract=2376177 or http://dx.doi.org/10.2139/ssrn.2376177

Jean Philippe Nicolai (Contact Author)

ETH Zürich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland

Jorge Zamorano

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES) ( email )

106-112 Boulevard de l'hopital
106-112 Boulevard de l'Hôpital
Paris Cedex 13, 75647
France

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