Cross-country comparison of the incentives of the EU emission trading scheme for replacing existing power plants in 2008-12

In this paper, we conduct a cross-country quantitative analysis of the replacement incentives generated by the EU Emission Trading Scheme (EU ETS) for the power sector in 2008-12. In order to do so, the allocation rules of the Member States are applied to concrete reference power plants for three different fuel types (lignite, hard coal and gas). Based on these calculations, we compare installation-specific replacement incentives across the Member States. Our analysis shows that replacement incentives vary significantly across Member States and typically deviate from the incentives provided in the reference case of full auctioning. Furthermore, the EU ETS allocation rules lead to perverse incentives in approximately 30% of the possible replacement options. Only 5 MS do not provide any perverse incentives. Finally, we explore the link between replacement incentives and allocation types. Based on our findings, we derive policy recommendations for the design of emission trading schemes emerging around the world.