Cost allocation under the EU ETS

After 2012, the third Phase of the EU Emissions Trading Scheme (EU ETS) comes into place that lasts until 2020. New to this system is the European harmonized allocation of rights. In addition, a larger part of the rights will be auctioned. For the Netherlands the third Phase of EU ETS implies that emissions of companies under the EU ETS have to be reduced by 21% compared to 2005. This results in cost increases. Companies have to reduce their emissions by means of investing in technical measures or buy allowances on the market. Also the cost of inputs may rise, such as electricity used in production processes.

This study, commissioned by the Ministry of Finance, addresses the question who in the end will pay for these higher costs: is that consumers, governments or businesses? This study focuses primarily on direct costs. Indirect effects and costs (such as changes in sales, employment or income from the corporation for the government) are not included in this study. The study takes a quantitative stand in assessing these costs using econometric and statistical techniques.

The analyses in this study show that CO2 emissions of Dutch plants under the EU ETS are expected to decrease to 68 Mton in 2020. About half of the 68 Mton rights that will be allocated in 2020 will be auctioned Рthe other half will be distributed for free. Auctioning takes place almost exclusively for electricity generation. Only 2% of industrial emissions are expected to fall under an auction regime, especially in some subsectors of the food industry and the paper industry.