Emission Trading : Auctioning vs. Grandfathering

Abstract: This thesis examines the debate between the auctioning of green house gas permits vs. the free distribution of green house gas permits, also known as grandfathering. The authors’ purpose is to discover which allocation system is more suited under the European Union Emissions Trading Scheme (EU ETS). To help draw the conclusion, data and views have been collected from different known researchers within the emission trading field and – compared to different theories and the view of the authors. Evidence suggested that auctioning as an allocation system is more efficient than a system based solely on free allocation (e.g. grandfathering). Evidence of this can be found in the electricity sector by comparing the electricity prices the consumer stand to pay before and after the producing firm receives there emission rights for free. When the producing firms receive their emission rights free of charge they stand with the option to sell their rights or to use them in their production. By selling its electricity the producers wants to recover their forgone opportunity and can do so via the price paid for by the consumer. By also looking at the two systems under distribution one can also see that auctioning is more efficient since under this system, the polluters end up buying the right to pollute from the public. With a system based on grandfathering, the affected firms under EU ETS will receive windfall profits when given the emission rights for free as they can choose to store and sell the rights at a later date.