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Winners and Losers of EU Emissions Trading: Insights from the EUTL Transfer Dataset

Abstract:
This paper analyses distributional effects between participants of the EU Emissions Trading System (EU ETS) during its first trading period. To this end, a selection model is formulated and applied to a dataset based on account information and transfer data from the EU Transaction Log (EUTL). Four different ways of adding carbon prices to the dataset are explored. Findings confirm that whether a company made a gain during the first period of EU emissions trading is highly dependent on the level of free allocation it received. Consequently, large industrial companies, especially in the iron and steel and cement sectors emerge as the biggest 'winners' as they were the companies with the highest allocation surplus. This also applies to a number of electricity generators located in Central and Eastern Europe. Policy makers therefore have to be mindful about decisions regarding the level of free allocation to individual sectors and companies, as those design choices have a large influence on the way in which gains and costs are distributed under the system, which in turn has repercussions on its political acceptability. Rules for free allocation are harmonised at EU-level since the beginning of the third trading period, but relatively generous free allocation to industrial sectors and additional sources of unequal treatment remain. The analysis also confirms that small companies were less likely to participate, which points to the existence of significant transaction costs preventing many small companies from realising potential gains on the market (as well as jeopardising the efficiency of the system). It is therefore important to reduce transaction costs for small companies, in particular at the beginning of an ETS, in order to incentivise market entry.
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Keywords: emissions trading, EU ETS, EUTL, distributional effects, selection model

DOI: 10.5547/2160-5890.7.2.jclu


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Published in Volume 7, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.