As discussed in Section 2.2, allowances under a cap-and-trade scheme are either allocated for free, auctioned, or allocated through a combination of both. This section examines each scenario for installations covered under an emissions cap. In order to examine allocations in the chemical context, there are three possible approaches to consider for the chemical sector; installation based allocations, benchmark-based allocations, and auctioning of allowances.
Figure 2.10 draws a comparison between each method for distributing allowances. Combustion installations covered under the EU ETS are currently subject to installation based allocations according to a national allocation plan for each country where the facilities operate. While this method has proved effective under the EU ETS, discussion of future auctioning of emissions allowances threatens industry with unjust cost distribution. Further criticism is placed on installation based allocations because it does not adequately credit early action and does not impose a similar emissions abatement cost curve under the assumption that the MAC increases with each additional initiative.
Benchmark based allocations are strongly promoted by industry associations such as Cefic for their ability to recognize high performing facilities that operate below the intensity benchmark; thus limiting the economic burden to the least efficient facilities which cause the most damage to the environment. While this is arguably more effective at achieving the overall objectives of an emissions trading scheme, it is particularly unjust for low performing facilities which risk severe lack of competitiveness issues.
Full auctioning of allowances is criticized by manufacturing industries but is particularly disadvantageous for some sectors of the chemical industry such as PVC, nitrogenous fertilizer, and soda ash producers, as demonstrated earlier in the chapter. Industry suggests that this approach does not drive market efficiency
and threatens price reduction of emission allowances, preventing industry to reduce beyond the reduction target. This system is also difficult to operate from an administrative position and results in large sums of revenue for the governing body to redistribute.
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