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Industry-Level Emission Trading in the EU

efficiency gains from restricting intra-EU permit trade to the electricity sector.³ Restriction
of emission trading to some sectors poses the question of how many emission rights should
be allocated to these sectors. For our simulations of emission trading across EU electricity
sectors, we adopt the following rule: Each EU country splits up its emission endowments
given by the EU burden sharing agreement according to the reduction of emissions in the
NTR case.⁴ In other words: the national government sets aside emission rights for the
electricity sector which are equal to the emissions generated by power producers in the
NTR case. Industry-level emission trading allows the EU power industry to identify the
least-cost emission abatement solution within the European electricity sector. At the same
time, each national government must assure that the other sectors in the economy do not
overuse the remaining emission rights (i.e. the Kyoto entitlements reduced by the permits
allocated to the electricity sector). In our simulations, all other non-electric sectors in the
economy are subject to a carbon tax which is set sufficiently high to keep with the
remaining emission budget. With respect to electricity-level emission trading, we
distinguish two cases: The scenario ELE_AP reflects a setting in which the government
auctions permits to the power industry; the scenario ELE_GP considers a setting where

³ Under implementation considerations, the excess costs of restricting trade provides an
upper bound for the transaction costs that arise from an extension of the permit trading
system.

⁴ Note that the allocation of emissions in the NTR case represents an efficient outcome if
only domestic action is permissible.

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