MODELLING THE ALLOWANCE ALLOCATION METHOD OF THE EU ETS

The paper evaluates the EU ETS allocation method—specifically the New Entrants Reserve (NER) and grandfathering—against output-based allocation (OBA), full auctioning, and border adjustments in the cement industry. It finds that while the EU ETS method effectively tackles carbon leakage, it creates economic distortions between new and existing plants, leading to lower overall welfare compared to border adjustments or OBA. The analysis suggests that the EU ETS method's primary advantage is its lower distributional impact on consumers and producers.

• The EU ETS allocation method is effective at preventing carbon leakage, achieving a leakage-to-reduction ratio of 3% in the central scenario, which is comparable to output-based allocation (OBA) and only slightly higher than auctioning with border adjustment (-2%).
• The EU ETS allocation method is less economically efficient than OBA because it creates a distortion between new and existing plants, resulting in higher economic costs for a given CO2 price.
• Border adjustment is identified as the most effective policy for maximizing world welfare and minimizing carbon leakage in the cement sector.
• The New Entrants Reserve (NER) can negatively impact the profits of existing plants by incentivizing new investments that drive down the market price of clinker, preventing firms from passing allowance costs to consumers.
• The EU ETS allocation method does not provide a better buffer against economic crises than OBA; while it may reduce profit variability for existing plants, it increases total profit variability due to the high volatility of profits from new plants.
• Despite lower overall welfare, the EU ETS allocation method may be politically preferable because it has lower distributional impacts, protecting both domestic producers and consumers compared to full auctioning.

APA

Quirion, P., Schumacher, K., & Healy, S. (2012). MODELLING THE ALLOWANCE ALLOCATION METHOD OF THE EU ETS. Climate Strategies. https://climatestrategies.org/wp-content/uploads/2014/11/modelling-the-allowance-allocation-method-of-the-eu-ets-cement-final-draft.pdf

Chicago

Quirion, Philippe, Katja Schumacher, and Sean Healy. MODELLING THE ALLOWANCE ALLOCATION METHOD OF THE EU ETS. Climate Strategies, 2012. https://climatestrategies.org/wp-content/uploads/2014/11/modelling-the-allowance-allocation-method-of-the-eu-ets-cement-final-draft.pdf.

Wikipedia

{{cite report |last1=Quirion |first1=Philippe |last2=Schumacher |first2=Katja |last3=Healy |first3=Sean |title=MODELLING THE ALLOWANCE ALLOCATION METHOD OF THE EU ETS |publisher=Climate Strategies |date=June 2012 |url=https://climatestrategies.org/wp-content/uploads/2014/11/modelling-the-allowance-allocation-method-of-the-eu-ets-cement-final-draft.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{quirion2012modelling, author = {Quirion, Philippe and Schumacher, Katja and Healy, Sean}, title = {{MODELLING THE ALLOWANCE ALLOCATION METHOD OF THE EU ETS}}, institution = {Climate Strategies}, year = {2012}, month = jun, url = {https://climatestrategies.org/wp-content/uploads/2014/11/modelling-the-allowance-allocation-method-of-the-eu-ets-cement-final-draft.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }