Allocation and Related Issues for Post-2012 Phases of the EU ETS Page: 3
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Criteria and Principles for Assessing Allocation and Cap-Setting Options
substitute for production in another. Because leakage reduces the emissions benefits of the
trading scheme, it also reduces the scheme's cost-effectiveness, as measured as cost per
global tonne reduced. Leakage therefore has the potential to undermine the central goals of
emissions trading-to reduce emissions to the cap and to achieve these reductions at least
cost.
Leakage would be avoided or reduced to the extent that the programme maintains production
and investment in the region covered by the trading program. In addition, leakage is avoided
/ reduced to the extent that the geographical boundaries of the trading scheme cover more of
the competing regions. Different allocation approaches may be more or less able to achieve
these aims.
2.2. Economic Efficiency of Trading Scheme
This category includes the effects that the allocation approach may have on the ability of the
trading scheme to incentivise emissions abatement at least cost, as well as any effects it may
have on the efficient and liquid operation of the allowance market. We thus distinguish two
key elements:
* Consistency with least-cost abatement; and
* Proper functioning of the allowance market.
2.2.1. Consistency with least-cost abatement decisions
One of the principal attractions of emissions trading is that it can provide incentives for
participants to conduct their operations and make investment decisions to minimize the cost
of achieving the level of emissions prescribed by the cap. These incentives are provided by
establishing a consistent cost of CO2 emissions that applies to all covered activities and
products. There are many potential options for reducing CO2 emissions, and in principle an
emissions trading scheme should be able to incentivise as much of each of them as will meet
the cap at least cost. However, there are some allocation approaches that may alter these
incentives-either by increasing the incentives for specific abatement alternatives, or
reducing the incentives for others (or both).
2.2.1.1. Options for reducing GHG emissions
When considering the efficiency of the allocation approach, it is useful to keep in mind the
following options for reducing direct emissions covered by the trading program-each of
which has associated costs and emissions benefits:
* Improving (C02-emitting) fuel efficiency. The incentive is provided by the higher total
costs of fuels when the cost of associated CO2 emissions is included.
* Switching to less C02-intensivefuels. The incentive is created when the relative costs of
fuels changes because of different CO2 contents, or because of changes to fuel market
conditions occasioned by the trading scheme.
* Improving efficiency of other C02- (and other GHG)-emitting processes. As with fuels,
the incentive is provided by the higher costs or prices of inputs when their GHG costs
must be included.NERA Economic Consulting
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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/m1/9/: accessed April 23, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; .