Allocation and Related Issues for Post-2012 Phases of the EU ETS Page: 85
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22.214.171.124. Ability to limit leakage
Where benchmarking is used for allocation to incumbents (rather than new entrants), and
where it is based on a historical baseline that is not updated, it would not be expected to
influence the extent of emissions leakage. This is a special case of a more general result from
economic theory which holds that different methods of free allocation do not influence the
production, abatement, or consumption decisions by those affected by the trading scheme.
This results holds only for certain conditions; however, there is little reason to believe that the
choice of benchmarking relative to other methods of distributing allowances would influence
By contrast, if the baseline period is updated, the type of benchmark used can influence the
behaviour of scheme participants in ways that influence leakage. Generally speaking,
updating leads to an incentive to increase the activity that enters into the benchmark - in the
anticipation that this may lead to higher future allocations. Thus output-based benchmarks
may encourage expansion of output, input-based benchmarks the use of input, etc. This
raises the possibility that output-based benchmarks can encourage the preservation of
production within the EU, although the magnitude of any such effects depends on the precise
details of the allocation. Also, such updating typically is associated with higher allowance
prices, as discussed below.
It has been suggested that the development of sector-wide allocation benchmarks could
facilitate international agreements to reduce emissions and the emergence of international
trading frameworks. This in turn could limit leakage, by ensuring a similar price on
emissions were applicable in relevant competitor countries. Benchmarks, it is suggested,
may make it easier to allow countries currently without emissions constraints to opt in
selected sectors, even where other emissions may remain unregulated, and to make the
sharing of reduction burdens transparent. However, such decisions ultimately are political in
nature, and the use of benchmarking would not, on their own, alter the costs incurred by
introducing emissions limits.
7.3.2. Economic efficiency of trading scheme
126.96.36.199. Consistency with least-cost abatement
Under "idealised" conditions, the allocation of allowances to incumbents would not be
expected to influence the overall cost of reducing emissions. This extends to the use of
benchmarking, which typically would not be associated with abatement or production choices
that differed from other methods of allocation. The fundamental reason for this is that the
allocation method would not be expected to influence the price of allowances - and therefore
also not the penalty for additional emissions or reward for additional emissions reductions.
Of course, the method of allocation has a direct influence on how the cost of emissions
reductions is distributed, as we discuss further below.
188.8.131.52.1. Impact of benchmarking under updating
The main exception to this is where allocations have "updating" features, i.e., are contingent
on decisions taken by installation operators after the start of the trading scheme, as discussed
above. The most prevalent updating feature in the current ETS is new entrant allocation, for
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]. (digital.library.unt.edu/ark:/67531/metadc29374/m1/91/: accessed September 19, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; .