Over-Allocation in the European Emissions Trading System

Abstract

Properly measuring the extent of over-allocation requires constructing a meaningful counterfactual. We propose an approach that exploits a policy change in the allocation of certificates in 2013, when the third phase of the European Emissions Trading System (ETS) started. From then onward, electricity producers were no longer granted free allocations, in contrast to all other installations endowed with certificates. By comparing these groups, we assess how installations would have behaved in Phase 3, had they still received freely allocated certificates as the control group did. Compared to Phase 2, electricity producers in Phase 3 held, on average, 424,680 fewer certificates, while emissions, sales, and purchases did not change. We interpret these findings as being indicative of over-allocation. Relative to the number of certificates awarded to the electricity-generating installations in Phase 2, over-allocation amounts to 64 %.