Price and welfare effects of emission quota allocation

• Published in: Energy economics Vol. 36; pp. 568 - 580
• Main Authors: Golombek, Rolf, Kittelsen, Sverre A.C., Rosendahl, Knut Einar
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.03.2013; Elsevier
• Subjects: Air pollution caused by fuel industries; Allocation of quotas; Applied sciences; Carbon emissions; Cost; Economic data; Electric energy; Electric power; Electricity; Electricity market; Energy; Energy economics; Energy market; Energy policy; Energy prices; Energy. Thermal use of fuels; Exact sciences and technology; General, economic and professional studies; General. Regulations. Norms. Economy; Markets; Power generation; Prices; Production; Quota market; Welfare economics; Q58; Allocation of quotas; Electricity market; H23; D61; Q41; Quota market
• ISSN: 0140-9883; 1873-6181
• DOI: 10.1016/j.eneco.2012.11.006

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 with heterogeneous electricity producers, 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 a theoretical analysis, which offers some new results. ► We analyze the impact of quota allocation schemes on the electricity market. ► We use a large-scale numerical model of the Western European energy market-LIBEMOD. ► The effects of different quota allocation mechanisms can differ significantly. ► Gas power production is sensitive to the quota allocation mechanism.