Generous allocation and a ban on banking - implications of a simulation game for EU emissions trading

Admitting banking in emissions trading systems reduces overall compliance costs by allowing for intertemporal flexibility: cost savings can be traded over time. However most, if not all, EU Member States prohibit the transfer of un-used allowances from the period of 2005-2007 into the first commitment period under the Kyoto Protocol, i.e. 2008-2012. At the same time, allowances appear to be allocated fairly generously to the emissions trading sector. In this paper, we first explore the implications of such a ban on banking when initial emission targets are lenient. This analysis is based on a simulation which was recently carried out in Germany with companies and with a student control group. The findings suggest that an EU-wide ban on banking would lead to efficiency losses in addition to those losses which arise from the lack of intertemporal flexibility.