The beginning of the year 2005 will mark the start of the European Emissions Trading System (EU ETS). As determined during the planning process, many of the more sensitive questions regarding the implementation of the EU ETS are to be decided by the participating Member States. Within the framework of the emissions trading scheme, all Member States are required to set out what are known as “National Allocation Plans”, which stipulate the rules according to which allowances are allocated (largely free of charge) and how many emission rights are to be sold to the individual businesses. However, determining how emissions allowances are to be distributed among the firms participating in emissions trading is not the sole objective of these allocation plans. National governments also have to specify how many allowances are to be allocated to the individual sectors participating in the trading scheme. Finally, under the agreement, Germany will, for instance, merely be required to reduce its emissions by 21 per cent compared to the level recorded in 1990. What percentage of this reduction should come from those sectors involved in emissions trading and what percentage from those not involved is left for the Member States to decide. If additional emissions allowances are, for instance, allocated to the sectors engaged in emissions trading (energy and industry), other sectors, such as private households and transportation, will have to make major cuts in greenhouse gas emissions. Since households and transportation service providers do not participate in the EU ETS, the new trading scheme is likely to create two separate sectors: the trading and non-trading sectors. Should one of these sectors receive "too many" emissions allowances, it is likely that companies in this sector will refrain from using cost-effective abatement options. The other sector, on the other hand, will have to make additional efforts in order to cut greenhouse emissions. This has two major consequences: First, the burden of abatement costs will be shifted from one sector to another. Secondly, reducing carbon dioxide emissions will likely become more expensive across all areas of the economy, since one sector is not making use of cost-effective reduction options.
In order to illustrate this efficiency problem, ZEW researchers have developed a simulation model. The analysis focuses on the hybrid approach to the emissions trading scheme. With the help of the model, users can simulate the effects of the Member States’ individual National Allocation Plans by specifying the shares allocated to the trading and non-trading sectors in the national emissions budgets.
The simulation is based on a simple partial model for the EU-15 (Simulation Based on Marginal Abatement Costs, SIMAC). Marginal abatement costs curves are displayed separately for trading sectors on the one hand, and non-trading sectors on the other. The implementation of the EU burden sharing agreement is simulated for three possible policy scenarios: (i) no emissions trading, but with minimal costs for each country; (ii) with emissions trading and the optimal allocation of emissions rights to trading and non-trading sectors (minimal costs on the European level); (iii) with emissions trading and with the National Allocation Plans specified by the user.
With SIMAC, it is possible to simulate the resulting certificate prices, the resulting tax rate in non-trading sectors, the implementation costs for the countries and sectors as well as CO2 emissions. Furthermore, the web-based interface allows users to save their customised scenarios and to specify and save other CO2 abatements costs functions.
More information on the simulation model is available for download in the ZEW Discussion Paper 04-40.
Interested parties who wish to access the simulation model or simulate some of the Allocation Plans, please contact: