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Introduction
Since January 1, 2005, a price has been paid for approximately half the carbon dioxide (CO2) emissions originating from a region of the world that accounts for about 20 percent of global GDP and 17 percent of the world’s energy-related CO2 emissions. On this date, the world’s first large-scale CO2 emissions trading program, the European Union’s Emissions Trading Scheme (EU ETS), began operating. Although the implementation has been uneven, as will be described more fully in the articles of this symposium, it has been effective. Despite the long time that it took for some of the twenty-five member states of the European Union (EU) to allocate emissions permits—or allowances—and to implement the electronic registries that would enable trading, a quantitative limit on CO2 emissions was imposed and since then, a market price has been paid for CO2 emissions by virtually all stationery, industrial, and electricity-generating installations within the EU.
This symposium, in the inaugural issue of the Review of Environmental Economics and Policy, focuses on key aspects of what is arguably the most significant attempt by any nation, or set of nations, to impose an effective limit on greenhouse gas emissions. The symposium is composed of three articles, each of which discusses a distinctive aspect of the EU ETS. This article is devoted mostly to the distinctive features that have emerged in the allocation of the newly limited rights to emit, called the European Union Allowances (EUAs), that are created by cap and trade programs. It also comments on the EU ETS’s origins and antecedents and reports the results from the program’s first year of operation. The article by Convery and Redmond (2007) titled ‘‘Market and Price Developments in the European Union Emissions Trading Scheme,’’ focuses on the activity without which no emissions trading system would work: the market for allowances. It also describes the
∗Massachusetts Institute of Technology, Cambridge, MA; E-mail: [email protected] ∗∗International Energy Agency, Fondazione Eni Enrico Mattei, Italy
∗∗∗Present address: International Energy Agency; E-mail: [email protected]
Review of Environmental Economics and Policy, volume 1, issue 1, winter 2007, pp. 66–87 doi: 10.1093/reep/rem003
© The Author 2007. Published by Oxford University Press on behalf of the Association of Environmental and Resource Economists. All rights reserved. For permissions, please email: [email protected]
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The EU Emissions Trading Scheme 67
main features of the EU ETS, its institutional and legal context, and what is likely to come in future years. The article by Kruger, Oates, and Pizer (2007) titled ‘‘Decentralization in the EU Emissions Trading Scheme and Lessons for Global Policy,’’ discusses the unique decentralized structure of the EU ETS and its implications for both the functioning of the EU ETS and the prospects for a more global emissions trading regime.
This article is organized as follows. The next section briefly describes the origins of the EU ETS, its relation to the Kyoto Protocol, and its precedents in Europe and the United States. The following seven sections discuss various aspects of the allocation of EUAs, with a partic- ular emphasis on the issues and problems encountered and their resolution. These include the lack of readily available installation-level data, the participants in the process, the use of projections, the choices of member states with respect to auctioning, benchmarking, and new entrant provisions, and the always difficult issue of deciding to whom the expected shortage is to be allocated. We then discuss the recently available data on emissions in 2005, what they indicate concerning overallocation, trading patterns, and abatement. The final section offers concluding remarks about the broader implications of the EU ETS, what seems to be unique about CO2, and the role of noneconomic considerations in the allocation of allowances.
Origins and Precedents of the European Union Emissions Trading Scheme
The EU ETS would likely not have come into existence without the Kyoto Protocol, but the story of that relationship contains its share of irony. Briefly, emissions trading is an American institutional innovation in environmental regulation that was forced into the negotiations on the Kyoto Protocol by the United States in late 1997 in the face of strong opposition from the EU. Resistance to the concept continued until the new American president pulled the United States out of the Kyoto Protocol in 2001, after which European opposition to emissions trading faded. Thereafter, the EU ETS became an indispensable instrument of European climate change policy and the primary means by which the EU member states would meet their obligations under the Kyoto Protocol.
While the EU ETS is clearly motivated by the Kyoto Protocol, it is embedded in EU law in a manner that makes its implementation independent of the Kyoto Protocol. Even if Russia had not ratified the Kyoto Protocol in late 2004, thereby allowing it to enter into force, the EU ETS would have still been implemented, although perhaps with less conviction. As a further example of this relationship, the current three-year trial trading period (2005 – 2007) for the EU ETS is not part of any obligation under the Kyoto Protocol. However, it is aimed at assuring compliance with the Kyoto Protocol, and the second EU ETS trading period (2008 – 2012) coincides with the first commitment period under the Kyoto Protocol. Finally, as illustrated by the current ‘‘post-2012’’ discussion, the EU ETS is expected to continue beyond 2012, regardless of what happens to the Kyoto Protocol.
European and U.S. Precedents: Similarities and Differences
Although the origins of the EU ETS cannot be explained without a reference to the Kyoto Protocol, European antipathy to emissions trading was never as strong as an observer at the negotiations in Kyoto and later Conferences of the Parties might have been led to believe. As
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68 A. D. Ellerman and B. K. Buchner
explained more fully in the article by Convery and Redmond (2007), favorable mention of market-based instruments had been made in official documents as early as the 1990s, well before the publication in 2000 of the Green Paper on GHG Emissions Trading (European Commission, 2000), which launched serious consideration of CO2 emissions trading as an integral part of climate policy in Europe. In addition, discussion and implementation of several small experiments in CO2 trading provided further experience (Ellerman 2000). The four most important programs were the UK Emissions Trading Scheme (UK ETS), the Danish CO2 trading program, the Dutch offset programs, and BP’s internal experiment with emissions trading.1 Although all are different in important ways from the EU ETS, they helped make emissions trading a less foreign concept. Finally, high-level commissions were established in Norway and Sweden to examine the feasibility of emissions trading, and both commissions recommended emissions trading as the primary means for meeting commitments under the Kyoto Protocol.
Emissions trading programs in the United States were closely followed by many in Europe, and comparisons are often made between EU ETS and the U.S. sulfur dioxide (SO2) cap and trade system. While the latter did serve in many ways as a model, there are significant differences in the two programs. First, the EU ETS is much larger, covering approximately 11,500 sources, compared to about 3,000 for the U.S. SO2 program. In addition, the level of prepolicy emissions in the EU ETS is over two billion metric tons of CO2, versus sixteen million (short) tons of SO2 in the U.S. program. Perhaps more significantly, the value of the allowances distributed under the EU ETS is equal to about $41 billion (at ¤15/metric ton and an exchange rate of U.S.$1.25/¤1.00) versus about $5 billion under the U.S. SO2 program (at $550/short ton). The only dimension in which the U.S. SO2 program exceeds the EU ETS is in the required emission reduction — 50 percent — versus the low to mid-single digits for the EU ETS. There are two other major differences between the EU ETS and the U.S. program. First, as discussed more fully in the contribution by Kruger, Pizer, and Oates (2007), the EU ETS has been implemented in a highly decentralized fashion, as might be expected of a multinational system. This is in stark contrast to the highly centralized implementation of the U.S. SO2 program, which is under one sovereign jurisdiction. The second major difference is that one program limits CO2 emissions and the other a more conventional pollutant that had been long controlled before the emissions trading program started. Although one type of emission might seem like another, at a more practical and
1The UK ETS, which started in 2002, is a mixed system that combines installations that accepted a cap in return for an incentive payment with a baseline-and-credit system intended to introduce flexibility into the Climate Change Agreements that had been negotiated between industry and the government. The Danish CO2 trading system, which started in 1999, was limited to the electricity utility sector. It included a safety valve feature at a relatively low level (approx U.S.$7/ton CO2). A ‘‘safety valve’’ approach ensures that costs do not become excessive by capping the cost per ton of CO2 at a specified maximum level. The Dutch programs were solicitations for Joint Implementation (JI) or Clean Development Mechanism (CDM) project credits intended to promote the cost-effective achievement of the Netherlands’ Kyoto obligations. BP’s emissions trading program imposed a greenhouse gas emissions limit on operating entities in many parts of the world, but it was voluntary and internal to the corporation (Victor and House, 2006).
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The EU Emissions Trading Scheme 69
political level the two are viewed as being very different with many implications, not the least of which concerns the allocation of allowances, the subject to which we now turn.2
Before engaging in the discussion of allocation issues in the EU ETS, we want to emphasize that the EU ETS is pioneering in its allocation of CO2 allowances to individual emitters.3 The Kyoto Protocol and the European Burden Sharing Agreement (BSA) allocated rights to emit greenhouse gases to nations, but not to individual legal entities. Earlier cap and trade programs in the United States have distributed allowances for conventional pollutants, such as SO2, but not CO2.
The Problem of Installation-level Data
Without a doubt, and to the surprise of many, the biggest problem in allocating allowances in the EU ETS was the absence of readily available installation-level data.4 Consequently, the collection and reconstruction of these data absorbed a large amount of resources and attention in what was already a very ambitious schedule for implementing the EU ETS.
Sources of the Data Problem
The problem was created first by the Emissions Trading Directive’s requirement to allocate at least 95 percent of EUAs to emitting installations and second by the fact that the CO2 inventory data, which had been collected and reported under the UN Framework Convention on Climate Change (UNFCCC), were based on fuel-use aggregates that did not break out emissions at the installation level.5 Even countries such as Germany and Sweden, that thought they had collected relatively good installation data for other purposes, found that they contained unacceptable errors. The only country for which this data problem did not exist was Denmark, which was already collecting emissions data at the installation level as part of its earlier CO2 trading system.
The data problem was compounded by the low threshold −20 MW thermal rating—for the inclusion of combustion sources. While this low threshold minimized competitive
2The remainder of this article draws heavily from the concluding chapter in the forthcoming Allocation in the European Emissions Trading System: Rights, Rents, and Fairness (A. Denny Ellerman, Barbara Buchner and Carlo Carraro, eds.) to be published by the Cambridge University Press. Other general sources for information and analysis of allocation in the EU ETS are Betz, Eichhammer, and Schleich (2004), O ̈ ko-Institut (2005), DEHSt (2005), Zetterberg et al. (2005), and Dufour and Leseur (2006).
3The earlier Danish CO2 trading program is the only exception, although the allocations were generally nonbinding and the effective instrument was a tax that was activated mostly when Danish coal-fired generators exported power to the rest of Scandinavia. The UK ETS did not involve allocation as usually defined since allowances were distributed to the winning bidders for incentive payments to join the scheme by accepting a cap on their emissions and a like endowment of tradable allowances.
4This problem was noted in an early study on allocation alternatives (Harrison and Radov, 2002): ‘‘No single EU database currently provides plant-level information that could be used as a solid foundation for plant-level allocations across the member states.’’
5The Emission Trading Directive, which was agreed to in late 2003, provides the legal authority for the EU ETS as explained more completely in Convery and Redmond (2007). The UN Framework Convention on Climate Change, negotiated in 1992 in Rio de Janeiro, provides the international structure for climate change policy and requires signatories to report greenhouse gas emissions, among other things.
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70 A. D. Ellerman and B. K. Buchner
distortions among installations in sectors included in the EU ETS, it greatly complicated the data problem, since typically, 80 percent or more of the sources accounted for 10 percent or less of emissions, and the data problems were proportional to installations and not to emissions.
Consequences of Data Problems
These initial data problems resulted in two consequences. First, the data had to be obtained directly from the sources being regulated through a voluntary effort because there was no existing legal authority to collect the data within the time frames required for implementing the system. However, industry was cooperative (perhaps because the allocations to installations depended on these data), and participants in the process reported relatively few cases of fraudulent submissions.6
The second consequence of the data problem was that some options for allocating allowances that might have been preferred were simply impractical. For instance, basing allocations on the 1990 emissions in order to reflect ‘‘early action,’’ and to be consistent with the Kyoto Protocol base year, was not feasible.
In contrast to some of the other allocation issues in the EU ETS, lack of data was a one-time problem that has now largely been overcome. The necessary data have been collected, allowances allocated to installations, and emissions data are being reported on an installation-by-installation basis. The important lesson for any future emission trading programs is that if allowances are to be allocated to incumbents (i.e., any installation covered by the EU ETS that was in operation when allowances were allocated), as has been the general pattern to date, installation-level data must be available.
Participants in the Allocation Process
The main participants in the allocation process were the European Commission, the member state governments, and the industrial firms that were to be included in the scheme and would be the main recipients of allowances. The role of these participants varied according to the two main issues to be decided: the ‘‘macro’’ decision concerning the total number of allowances to be created by each member state, and the ‘‘micro’’ decision concerning how this total would be allocated to affected firms in each member state. Each member state took the initiative in proposing in its National Allocation Plan (NAP) a total and in specifying the allocation to installations, but both aspects were subject to review by the commission. As discussed in the article by Kruger, Pizer, and Oates (2007), the decentralized, parallel processes by which these decisions were made created some problems. Here, we focus on the role of the commission in coordinating these processes and on the participants in the micro level decisions.
6For example, the German Emissions Trading Authority found few serious discrepancies when it followed up with a later collection of verified baseline emissions data for installations (private communication from Martin Cames). A number of the contributions in Ellerman, Buchner, and Carraro (2007) reported similar findings.
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Introduction
Since January 1, 2005, a price has been paid for approximately half the carbon dioxide (CO2) emissions originating from a region of the world that accounts for about 20 percent of global GDP and 17 percent of the world’s energy-related CO2 emissions. On this date, the world’s first large-scale CO2 emissions trading program, the European Union’s Emissions Trading Scheme (EU ETS), began operating. Although the implementation has been uneven, as will be described more fully in the articles of this symposium, it has been effective. Despite the long time that it took for some of the twenty-five member states of the European Union (EU) to allocate emissions permits—or allowances—and to implement the electronic registries that would enable trading, a quantitative limit on CO2 emissions was imposed and since then, a market price has been paid for CO2 emissions by virtually all stationery, industrial, and electricity-generating installations within the EU.
This symposium, in the inaugural issue of the Review of Environmental Economics and Policy, focuses on key aspects of what is arguably the most significant attempt by any nation, or set of nations, to impose an effective limit on greenhouse gas emissions. The symposium is composed of three articles, each of which discusses a distinctive aspect of the EU ETS. This article is devoted mostly to the distinctive features that have emerged in the allocation of the newly limited rights to emit, called the European Union Allowances (EUAs), that are created by cap and trade programs. It also comments on the EU ETS’s origins and antecedents and reports the results from the program’s first year of operation. The article by Convery and Redmond (2007) titled ‘‘Market and Price Developments in the European Union Emissions Trading Scheme,’’ focuses on the activity without which no emissions trading system would work: the market for allowances. It also describes the
∗Massachusetts Institute of Technology, Cambridge, MA; E-mail: [email protected] ∗∗International Energy Agency, Fondazione Eni Enrico Mattei, Italy
∗∗∗Present address: International Energy Agency; E-mail: [email protected]
Review of Environmental Economics and Policy, volume 1, issue 1, winter 2007, pp. 66–87 doi: 10.1093/reep/rem003
© The Author 2007. Published by Oxford University Press on behalf of the Association of Environmental and Resource Economists. All rights reserved. For permissions, please email: [email protected]
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at University of Sydney on August 31, 2014The EU Emissions Trading Scheme 67
main features of the EU ETS, its institutional and legal context, and what is likely to come in future years. The article by Kruger, Oates, and Pizer (2007) titled ‘‘Decentralization in the EU Emissions Trading Scheme and Lessons for Global Policy,’’ discusses the unique decentralized structure of the EU ETS and its implications for both the functioning of the EU ETS and the prospects for a more global emissions trading regime.
This article is organized as follows. The next section briefly describes the origins of the EU ETS, its relation to the Kyoto Protocol, and its precedents in Europe and the United States. The following seven sections discuss various aspects of the allocation of EUAs, with a partic- ular emphasis on the issues and problems encountered and their resolution. These include the lack of readily available installation-level data, the participants in the process, the use of projections, the choices of member states with respect to auctioning, benchmarking, and new entrant provisions, and the always difficult issue of deciding to whom the expected shortage is to be allocated. We then discuss the recently available data on emissions in 2005, what they indicate concerning overallocation, trading patterns, and abatement. The final section offers concluding remarks about the broader implications of the EU ETS, what seems to be unique about CO2, and the role of noneconomic considerations in the allocation of allowances.
Origins and Precedents of the European Union Emissions Trading Scheme
The EU ETS would likely not have come into existence without the Kyoto Protocol, but the story of that relationship contains its share of irony. Briefly, emissions trading is an American institutional innovation in environmental regulation that was forced into the negotiations on the Kyoto Protocol by the United States in late 1997 in the face of strong opposition from the EU. Resistance to the concept continued until the new American president pulled the United States out of the Kyoto Protocol in 2001, after which European opposition to emissions trading faded. Thereafter, the EU ETS became an indispensable instrument of European climate change policy and the primary means by which the EU member states would meet their obligations under the Kyoto Protocol.
While the EU ETS is clearly motivated by the Kyoto Protocol, it is embedded in EU law in a manner that makes its implementation independent of the Kyoto Protocol. Even if Russia had not ratified the Kyoto Protocol in late 2004, thereby allowing it to enter into force, the EU ETS would have still been implemented, although perhaps with less conviction. As a further example of this relationship, the current three-year trial trading period (2005 – 2007) for the EU ETS is not part of any obligation under the Kyoto Protocol. However, it is aimed at assuring compliance with the Kyoto Protocol, and the second EU ETS trading period (2008 – 2012) coincides with the first commitment period under the Kyoto Protocol. Finally, as illustrated by the current ‘‘post-2012’’ discussion, the EU ETS is expected to continue beyond 2012, regardless of what happens to the Kyoto Protocol.
European and U.S. Precedents: Similarities and Differences
Although the origins of the EU ETS cannot be explained without a reference to the Kyoto Protocol, European antipathy to emissions trading was never as strong as an observer at the negotiations in Kyoto and later Conferences of the Parties might have been led to believe. As
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at University of Sydney on August 31, 201468 A. D. Ellerman and B. K. Buchner
explained more fully in the article by Convery and Redmond (2007), favorable mention of market-based instruments had been made in official documents as early as the 1990s, well before the publication in 2000 of the Green Paper on GHG Emissions Trading (European Commission, 2000), which launched serious consideration of CO2 emissions trading as an integral part of climate policy in Europe. In addition, discussion and implementation of several small experiments in CO2 trading provided further experience (Ellerman 2000). The four most important programs were the UK Emissions Trading Scheme (UK ETS), the Danish CO2 trading program, the Dutch offset programs, and BP’s internal experiment with emissions trading.1 Although all are different in important ways from the EU ETS, they helped make emissions trading a less foreign concept. Finally, high-level commissions were established in Norway and Sweden to examine the feasibility of emissions trading, and both commissions recommended emissions trading as the primary means for meeting commitments under the Kyoto Protocol.
Emissions trading programs in the United States were closely followed by many in Europe, and comparisons are often made between EU ETS and the U.S. sulfur dioxide (SO2) cap and trade system. While the latter did serve in many ways as a model, there are significant differences in the two programs. First, the EU ETS is much larger, covering approximately 11,500 sources, compared to about 3,000 for the U.S. SO2 program. In addition, the level of prepolicy emissions in the EU ETS is over two billion metric tons of CO2, versus sixteen million (short) tons of SO2 in the U.S. program. Perhaps more significantly, the value of the allowances distributed under the EU ETS is equal to about $41 billion (at ¤15/metric ton and an exchange rate of U.S.$1.25/¤1.00) versus about $5 billion under the U.S. SO2 program (at $550/short ton). The only dimension in which the U.S. SO2 program exceeds the EU ETS is in the required emission reduction — 50 percent — versus the low to mid-single digits for the EU ETS. There are two other major differences between the EU ETS and the U.S. program. First, as discussed more fully in the contribution by Kruger, Pizer, and Oates (2007), the EU ETS has been implemented in a highly decentralized fashion, as might be expected of a multinational system. This is in stark contrast to the highly centralized implementation of the U.S. SO2 program, which is under one sovereign jurisdiction. The second major difference is that one program limits CO2 emissions and the other a more conventional pollutant that had been long controlled before the emissions trading program started. Although one type of emission might seem like another, at a more practical and
1The UK ETS, which started in 2002, is a mixed system that combines installations that accepted a cap in return for an incentive payment with a baseline-and-credit system intended to introduce flexibility into the Climate Change Agreements that had been negotiated between industry and the government. The Danish CO2 trading system, which started in 1999, was limited to the electricity utility sector. It included a safety valve feature at a relatively low level (approx U.S.$7/ton CO2). A ‘‘safety valve’’ approach ensures that costs do not become excessive by capping the cost per ton of CO2 at a specified maximum level. The Dutch programs were solicitations for Joint Implementation (JI) or Clean Development Mechanism (CDM) project credits intended to promote the cost-effective achievement of the Netherlands’ Kyoto obligations. BP’s emissions trading program imposed a greenhouse gas emissions limit on operating entities in many parts of the world, but it was voluntary and internal to the corporation (Victor and House, 2006).
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at University of Sydney on August 31, 2014The EU Emissions Trading Scheme 69
political level the two are viewed as being very different with many implications, not the least of which concerns the allocation of allowances, the subject to which we now turn.2
Before engaging in the discussion of allocation issues in the EU ETS, we want to emphasize that the EU ETS is pioneering in its allocation of CO2 allowances to individual emitters.3 The Kyoto Protocol and the European Burden Sharing Agreement (BSA) allocated rights to emit greenhouse gases to nations, but not to individual legal entities. Earlier cap and trade programs in the United States have distributed allowances for conventional pollutants, such as SO2, but not CO2.
The Problem of Installation-level Data
Without a doubt, and to the surprise of many, the biggest problem in allocating allowances in the EU ETS was the absence of readily available installation-level data.4 Consequently, the collection and reconstruction of these data absorbed a large amount of resources and attention in what was already a very ambitious schedule for implementing the EU ETS.
Sources of the Data Problem
The problem was created first by the Emissions Trading Directive’s requirement to allocate at least 95 percent of EUAs to emitting installations and second by the fact that the CO2 inventory data, which had been collected and reported under the UN Framework Convention on Climate Change (UNFCCC), were based on fuel-use aggregates that did not break out emissions at the installation level.5 Even countries such as Germany and Sweden, that thought they had collected relatively good installation data for other purposes, found that they contained unacceptable errors. The only country for which this data problem did not exist was Denmark, which was already collecting emissions data at the installation level as part of its earlier CO2 trading system.
The data problem was compounded by the low threshold −20 MW thermal rating—for the inclusion of combustion sources. While this low threshold minimized competitive
2The remainder of this article draws heavily from the concluding chapter in the forthcoming Allocation in the European Emissions Trading System: Rights, Rents, and Fairness (A. Denny Ellerman, Barbara Buchner and Carlo Carraro, eds.) to be published by the Cambridge University Press. Other general sources for information and analysis of allocation in the EU ETS are Betz, Eichhammer, and Schleich (2004), O ̈ ko-Institut (2005), DEHSt (2005), Zetterberg et al. (2005), and Dufour and Leseur (2006).
3The earlier Danish CO2 trading program is the only exception, although the allocations were generally nonbinding and the effective instrument was a tax that was activated mostly when Danish coal-fired generators exported power to the rest of Scandinavia. The UK ETS did not involve allocation as usually defined since allowances were distributed to the winning bidders for incentive payments to join the scheme by accepting a cap on their emissions and a like endowment of tradable allowances.
4This problem was noted in an early study on allocation alternatives (Harrison and Radov, 2002): ‘‘No single EU database currently provides plant-level information that could be used as a solid foundation for plant-level allocations across the member states.’’
5The Emission Trading Directive, which was agreed to in late 2003, provides the legal authority for the EU ETS as explained more completely in Convery and Redmond (2007). The UN Framework Convention on Climate Change, negotiated in 1992 in Rio de Janeiro, provides the international structure for climate change policy and requires signatories to report greenhouse gas emissions, among other things.
Downloaded from
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at University of Sydney on August 31, 201470 A. D. Ellerman and B. K. Buchner
distortions among installations in sectors included in the EU ETS, it greatly complicated the data problem, since typically, 80 percent or more of the sources accounted for 10 percent or less of emissions, and the data problems were proportional to installations and not to emissions.
Consequences of Data Problems
These initial data problems resulted in two consequences. First, the data had to be obtained directly from the sources being regulated through a voluntary effort because there was no existing legal authority to collect the data within the time frames required for implementing the system. However, industry was cooperative (perhaps because the allocations to installations depended on these data), and participants in the process reported relatively few cases of fraudulent submissions.6
The second consequence of the data problem was that some options for allocating allowances that might have been preferred were simply impractical. For instance, basing allocations on the 1990 emissions in order to reflect ‘‘early action,’’ and to be consistent with the Kyoto Protocol base year, was not feasible.
In contrast to some of the other allocation issues in the EU ETS, lack of data was a one-time problem that has now largely been overcome. The necessary data have been collected, allowances allocated to installations, and emissions data are being reported on an installation-by-installation basis. The important lesson for any future emission trading programs is that if allowances are to be allocated to incumbents (i.e., any installation covered by the EU ETS that was in operation when allowances were allocated), as has been the general pattern to date, installation-level data must be available.
Participants in the Allocation Process
The main participants in the allocation process were the European Commission, the member state governments, and the industrial firms that were to be included in the scheme and would be the main recipients of allowances. The role of these participants varied according to the two main issues to be decided: the ‘‘macro’’ decision concerning the total number of allowances to be created by each member state, and the ‘‘micro’’ decision concerning how this total would be allocated to affected firms in each member state. Each member state took the initiative in proposing in its National Allocation Plan (NAP) a total and in specifying the allocation to installations, but both aspects were subject to review by the commission. As discussed in the article by Kruger, Pizer, and Oates (2007), the decentralized, parallel processes by which these decisions were made created some problems. Here, we focus on the role of the commission in coordinating these processes and on the participants in the micro level decisions.
6For example, the German Emissions Trading Authority found few serious discrepancies when it followed up with a later collection of verified baseline emissions data for installations (private communication from Martin Cames). A number of the contributions in Ellerman, Buchner, and Carraro (2007) reported similar findings.
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