Allocation and Related Issues for Post-2012 Phases of the EU ETS Page: 69
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Emissions Grandfathering Allocation
would depend on the amount of allowances remaining given the requirement to comply
within the overall Member State total number of allowances.
6.2.4.5. Set-asides
Additional modifications to allocations also may be necessary if some allowances are set-
aside for particular groups of installations, thus reducing the amount available to others. In
particular, set-asides for new entrants result in lower allocations for incumbents for a given
cap. It also is possible to use a set-aside system to provide bonuses to particular technologies
(e.g., technologies deemed to be particularly "clean"). In practice the set-aside can be
deducted before or after the initial installation-level allocations are calculated.
6.3. Evaluation
This section evaluates emissions grandfathering allocation against the criteria of
environmental effectiveness, economic efficiency, administrative cost and feasibility, and
fairness and distributional equity.
A widely accepted result of economic theory is that, given certain standard conditions,
allocations based purely on historical information will provide incentives for abatement and
changes to operations that are identical to auctioning of allowances.39 Thus grandfathered
allocations would not alter the behaviour of participants, relative to what they would do under
auctioning. This result applies to decisions about how to reduce emissions, how much to
produce using what technologies and processes, and how prices will be affected. For this
reason, the evaluation of allocation based on historical emissions is very similar to that of
allocation based on other historical activity levels using benchmarked allocations. For
discussion of the first two criteria, we refer the reader to the more detailed discussion of this
in the next chapter on benchmarking allocations.
6.3.1. Environmental effectiveness
6.3.1.1. Ability to maintain cap
The total emissions, and therefore environmental effectiveness, of the trading scheme depend
on the total number of allowances rather than on the allocation of these allowances. For a
given cap, the precise implementation of emissions grandfathering therefore does not
influence the environmental benefit achieved by the scheme. An exception to this may be if
the allocation approach imposes significant costs on participants and therefore results in more
resistance to stringent cap-setting. In addition, if the allocation approach departs from the
conditions necessary to ensure that grandfathering and auctioning produce identical
incentives, less stringent caps also may be more likely, because the overall cost-effectiveness
of the scheme is reduced. (We discuss this latter possibility in the chapters on new entrant
allocations and closures and on updating allocations.)
39 As noted in section 5.3.1.2, these conditions include a requirement that transaction costs be negligible, that there is
perfect competition in product and emissions markets, that emissions costs are low relative to other costs and the overall
value of economic activity (eliminating any income effects), and that allocations are independent of any subsequent
decisions taken by the recipients (i.e. allocations are not "updated"). Where these conditions do not hold, allocations
may influence decisions about economic activity.NERA Economic Consulting
69
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Harrison, David, Jr.; Radov, Daniel & Klevnas, Per. Allocation and Related Issues for Post-2012 Phases of the EU ETS, text, October 22, 2007; [Brussels, Belgium]. (https://digital.library.unt.edu/ark:/67531/metadc29374/m1/75/: accessed April 24, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; .