Implications of announced Phase 2 National Allocation Plans for the EU ETS

The document analyzes the proposed National Allocation Plans (NAPs) for the 2008-2012 period of the EU ETS, arguing that excessive free allowance allocation, particularly in the power sector, creates significant economic distortions. It finds that free allocations to new installations often act as subsidies for fossil fuel generation, potentially making coal power more profitable under the ETS than without it. The authors highlight a lack of harmonization across Member States, the underutilization of auctioning, and the risk of an 'early action problem' where historic-based allocations discourage immediate emission reductions. The paper suggests that reducing free allocations and increasing auctioning would improve cost-efficiency and support low-carbon investment.

• Free allowance allocations for new installations in the power sector distort investment incentives toward fossil fuel generation, sometimes covering all expected emissions for coal power stations.
• The level of subsidies provided through free allocation is high enough that constructing coal power stations can be more profitable under the EU ETS than if the system did not exist.
• Germany's National Allocation Plan is noted for providing the highest general allocation for new coal generation and includes specific provisions for even higher allocations for new lignite-fired plants.
• The continued use of historic emissions as the basis for allowance allocation creates an 'early action problem,' where investments in emission reductions are discouraged because they may lead to lower future allocations.
• EU Member States have not fully utilized the option to auction up to 10% of available allowances, which the authors argue would reduce distortions and support a price floor for low-carbon technologies.
• Projections suggest that up to 295.2 MtCO2, or 15.8% of emissions for eligible installations in the EU, could be covered by Joint Implementation (JI) and Clean Development Mechanism (CDM) credits, potentially conflicting with the Directive's supplementarity criteria.

APA

Neuhoff, K., Åhman, M., Betz, R., Cludius, J., Ferrario, F., Holmgren, K., Pal, G., Grubb, M., Matthes, F., Rogge, K., Sato, M., Schleich, J., Sijm, J., Tuerk, A., Kettner, C., & Walker, N. (2006). Implications of announced Phase 2 National Allocation Plans for the EU ETS. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2014/11/1-nap2-131106.pdf

Chicago

Neuhoff, Karsten, Markus Åhman, Regina Betz, Johanna Cludius, Federico Ferrario, Kristina Holmgren, Gabriella Pal, et al. Implications of announced Phase 2 National Allocation Plans for the EU ETS. Climate Strategies, 2006. https://climatestrategies.org/wp-content/uploads/2014/11/1-nap2-131106.pdf.

Wikipedia

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BibTeX

@techreport{neuhoff2006implications, author = {Neuhoff, Karsten and Åhman, Markus and Betz, Regina and Cludius, Johanna and Ferrario, Federico and Holmgren, Kristina and Pal, Gabriella and Grubb, Michael and Matthes, Felix and Rogge, Karoline and Sato, Misato and Schleich, Joachim and Sijm, Jos and Tuerk, Andreas and Kettner, Claudia and Walker, Neil}, title = {{Implications of announced Phase 2 National Allocation Plans for the EU ETS}}, institution = {Climate Strategies}, year = {2006}, month = nov, url = {https://climatestrategies.org/wp-content/uploads/2014/11/1-nap2-131106.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }