Industry-Level Emission Trading in the EU
In this context, we analyze the economic implications of industry-level emission trading
within the EU. The prime candidate for restricted industry-level trading is the electricity
sector which - according to the most recent Business-as-Usual (BaU) projections (EiE
1999) - will continue to account for roughly a third of the overall EU carbon emissions and
more than 70% of the industry's total emissions. We compare the magnitude and
distribution of efficiency gains from permit trading across EU electricity sectors with the
no-trade case in which EU member countries meet their Kyoto targets through strictly
domestic action. In addition, we supplement information about the extent to which EU-
wide industry-level emission trading within the electricity sector reduces potential
efficiency gains that accrue from full trade of emission permits within the EU. As to
industry-level emission trading we distinguish two sub-cases. One, in which emission
rights are handed out for free to the power producers in their countries, and one, in which
permits are auctioned to the power producers by the respective governments.
The key insights from our analysis can be summarized as follows:
(i) Emission trading at the level of the European power industry, where permits are
auctioned by the respective governments, reduces EU-wide costs of meeting the Kyoto
targets through strictly domestic action by about 20%. This corresponds to roughly half of
the cost savings achievable through a comprehensive permit trading system.
(ii) Grandfathering permits instead of auctioning them has important efficiency
implications. When permits are given away to power producers at no charge on the
condition that the additional income is used to support production, efficiency gains from
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