Vortrag
Free Allocation and the Endowment Effect in Cap-and-Trade Systems: Evidence from the European Electricity Sector

Aleksandar Zaklan

22nd Annual Conference of the European Association of Environmental and Resource Economists : EAERE 2016
Zürich, Schweiz, 22.06.2016 - 25.06.2016



Abstract:
Independence of installation-level emissions from allocations constitutes a necessary condition for the cost-effectiveness of a cap-and-trade system. An endowment effect, i.e. a causal relationship between allocations and emissions, indicates a loss of cost effectiveness due to free allocation. The issue is relevant to the EU ETS, where a large share of the total allocation occurs for free. This paper tests for the presence of an endowment effect in the European electricity sector by evaluating the causal relationship between free allocation and plant-level CO2 emissions. To overcome the endogeneity of allocations I exploit a natural experiment inducing exogenous variation in the allocation of allowances to power producers. While full auctioning of permits for electricity producers located in EU-15 countries began in 2013, free allocation continued under the so-called 10c rule in eight member states. I apply a matched difference-in-differences research design to a unique EU-wide plant-level dataset of emissions and technical characteristics, constructing the control group by means of a synthetic control method. I find no evidence of a general endowment effect, and some limited evidence for a sub-sample of small installations. The results suggest that some limited distortion through free allocation may occur due to the behavior of small plants.