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Initial Allocations in the Regional Greenhouse Gas Initiative: Alternatives and ImplicationsPresented byDavid Harrison, Jr., Ph.D.Senior Vice President
Regional Greenhouse Gas Initiative Stakeholder Group Meeting
New York CityJune 24, 2004
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NERA Experience in Emissions Trading
NERA staff have been involved in the design or analysis of nearly all of the major emissions trading programmes implemented to date
NERA involvement in EU ETS– March 2002 report prepared for the Commission on initial
allocation alternatives.
– Assisting UK government in developing its NAP
– Evaluating UK CO2 program (for UK government)
– Helping various private clients understand allocation effects
Of course, this presentation represents personal views, and should not be taken as indicative of the opinions of NERA’s clients
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Outline
Overview of Allocation Alternatives NERA Allocation Study: Evaluation
Criteria and General Conclusions Three Specific Issues from EC
Experience Conclusions
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Allowance Allocation: Alternative Methodologies
The table below summarises some basic allocation alternatives
Free Auctioning
Non-updated Maximum 5%
Updating Other
Emissions Product Output
Fuel or other Inputs Capacity
1998 1999 2000
2001 2002 Other Years
Single Year Average MaxSpecific Data/ Formula
Basic Allocation Type
Metric Used
Years Used
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Some Additional Allocation Elements
Set asides– For specific installations or technologies
– For all new entrants (form of “updating”)
Projections could be used rather than past data– Business as Usual projections without CO2 trading
– Regulatory targets
– Feasibility (marginal costs)
“Indirect emissions” could be reflected– Range from zero to 100%
Credits or additional allowances could be provided to recognize “early action”
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Summary of Allocations in Previous Emissions Trading Programs
Most existing programs use non-updated (“grandfathering”)– No major auctions in U.S. but UK CO2 program uses an
auction
– Some examples of updating in NOx Budget program
Many variations in metric for grandfathering (input, output, emissions, years)– No existing examples of indirect emissions
Recipients are facilities covered in the program– Some early action credits
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NERA Allocation Study—Two Major Types of Evaluation Criteria
Efficiency:– Compliance cost minimization
– Administrative cost minimization
– Transaction cost minimization
– Product market distortions
– Removal of tax distortions
Distributional: – Sector burden
– Reduces stranded costs
– Taxpayer burden
– Consumer and labor market burden
– Rewards early action
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NERA Allocation Study—Key Qualitative Conclusions
Grandfather vs. auction– Same efficiency effects in allowance and product
markets Differences if electricity markets are not deregulated Potential tax efficiency gains from auction
– Different distributional effects
Updating has several potential inefficiencies– Compliance costs may not be minimized
– Product markets and trade may be distorted
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NERA Allocation Study—Key Empirical Conclusions
Need to develop plant-level information– No single EU database for plant-specific information
Proxies sometimes inaccurate and need verification
– Member States differ greatly in plant-level data (emissions, fuel inputs, production)
Sector impacts vary– Sectors fare quite differently under alternatives
considered (historical, least-cost emissions, +indirect)
Plant impacts vary– Plants fare very differently under alternatives
considered (grandfathering with emissions, inputs, outputs and grandfathering with auction phase-in)
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1. Data availability
2. Confusion over incentives created by allocation approaches
3. Interactions among State programs
Three Specific Issues from EC Experience
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Data Availability
Sometimes limits feasible approaches– E.g., UK, only very limited data available (initially) at the
installation level before 1998.
– Limits on types of data, with output and inputs not readily available (other than power sector).
Some facilities may have no historical data– E.g., 20 MW-50 MW facilities
Implications– May need to obtain/verify additional data from
individual installations
– Limit allocation alternatives to those for which adequate data are available
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Framework for Considering Allocation Incentives for Firms
CO2 Emissions
$/Ton
Market Allowance
Price
AllocationMarginal Abatement Cost Curve
Baseline Emissions
Controlled Emissions
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Why Grandfathered Allocations Don’t Affect Firm Decisions on Emissions
Two different allocation levels… – …but facility emissions levels are the same
Controlled Emissions
Controlled Emissions
CO2 Emissions
£/Ton
Market Allowance
Price
Allocation
Marginal Abatement Cost Curve
Baseline Emissions
CO2 Emissions
£/Ton
Market Allowance
Price
Allocation
Marginal Abatement Cost Curve
Baseline Emissions
$/ton $/ton
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Interactions Among State Allocations
General issue: which features of a multi-State trading program should be the same in all States?
– Raised in previous multi-jurisdiction programs (e.g., NOx Budget Program)
– General conclusion: allocations can differ
Potential problems can arise; e.g., allocation to “new entrants”
– Single State trying to attract investment could use allocation as “carrot” to new entrants
– If one State adopts, and no others, creates an incentive for investment in that State.
Implications: all States will allocate to new entrants– A kind of “prisoner’s dilemma”
– In the end, could raise costs to everyone
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General Conclusions and Recommendations
Importance of detailed analyses by governments and participating sectors/firms– Data availability (may include collection of
confidential/verified company information)
– Determine “what is at stake” under major alternatives
– Consider implications of additional details (e.g., credits for early action, credits for renewables)
– Provide the basis for informed decision-making process
Sound initial allocation is both important and possible– Encourage cost savings from trading
– Avoid competitive product market distortions
– Avoid serious adverse distributional impacts
