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Industry-Level Emission Trading in the EU

to terms-of-trade effects, not all countries will necessarily gain from permit trade. In fact,
AUT, DEU, and FRA suffer from a terms-of-trade loss as compared to NTR. Their gains in
competitiveness with respect to energy-intensive production vanishes with equalized
marginal abatement costs across EU countries which is not offset by permit sales.

How will the magnitude and the distribution of abatement costs change when we restrict
intra-EU permit trade to the electricity industry? For ELE_AP, where emission permits are
auctioned by the respective governments to the power sector, the aggregate efficiency
gains as compared to the full-trade case drop by half. Although this loss appears
substantial, one could argue that emission trading between EU power generators only
brings in 50% of the efficiency gains from unrestricted permit trade. From an
implementing point of view, the extension of permit trade to sectors where the operation of
a permit system can become much more costly does not warrant large additional economic
gains. Another interesting result is that AUT, DEU, and FRA actually would prefer
restricted trade between power producers over both the full-trade scenario TRD and the no-
trade scenario NTR. The reasoning behind this is that trade across the EU power industry
still provides significant differences in marginal abatement costs for the non-electric
sectors such that AUT, DEU, and FRA further experience gains in comparative advantage
due to their low abatement costs (as compared to TRD) and make additional income from
permit sales in the European electricity market (as compared to NTR). The terms-of-trade
gains for AUT, DEU, and FRA work at the expense of the other EU countries whose
welfare gains from full trade are substantially reduced under ELE-AP.

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