Cap and Invest

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Why Auctioning gains Prominence in the EU's Emission Trading Scheme

By Dennis Taenzler and Sibyl Steuwer

The trading of emission allowances has gained increasing prominence as a key climate protection policy throughout the world. The findings of the analysis by Dennis Taenzler and Sybil Steuwer of Berlin based think-tank Adelphi Research suggest that the establishment of emissions trading is currently entering a decisive stage since arguments against the free allocation of allowances are gaining strength. Accordingly, the following conclusion is drawn: If allowances are allocated for free, power companies are most likely to price-in the value of allowances into electricity prices. This can lead to considerable windfall profits. These windfall profits can only be avoided in a fair manner when selling allowances and thus receiving revenue. This is no longer an exclusive insight of economists. Based on initial experiences in emissions trading and allocation, European policy-makers now widely favor auctions.

This report was recently presented at a Washington DC event by the Heinrich Boell Foundation and the Environment and Energy Study Institute (EESI).

Download the report here (136 MB, 32 pages)

Read the event summary and download the speakers' slides here.