How emission certificate allocations distort fossil investments: The German example

Arbeitspapier

Despite political activities to foster a low-carbon energy transition, Germany currently sees a considerable number of new coal power plants being added to its power mix. There are several possible drivers for this dash for coal, but it is widely accepted that windfall profits gained through free allocation of ETS certificates play an important role. Yet the quantification of allocation-related investment distortions has been limited to back-of-the envelope calculations and stylized models so far. We close this gap with a numerical model integrating both Germany's particular allocation rules and its specific power generation structure. We find that technology specific new entrant provisions have substantially increased incentives to invest in hard coal plants compared to natural gas at the time of the ETS onset. Expected windfall profits compensated more than half the total capital costs of a hard coal plant. Moreover, a shorter period of free allocations would not have turned investors' favours towards the cleaner natural gas technology because of preexisting economic advantages for coal. In contrast, full auctioning of permits or a single best available technology benchmark would have made natural gas the predominant technology of choice.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: DIW Discussion Papers ; No. 1097

Classification and Topics

• Classification: Wirtschaft ; Energy: Government Policy ; Climate; Natural Disasters and Their Management; Global Warming ; Environmental Economics: Government Policy
• Subject: emissions trading ; allocation rules ; power markets ; investments

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Pahle, Michael ; Fan, Lin ; Schill, Wolf-Peter
• Event: Veröffentlichung
• (who): Deutsches Institut für Wirtschaftsforschung (DIW)
• (where): Berlin
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/52530
• Last update: 10.03.2025, 11:41 AM CET