Template-Type: ReDIF-Article 1.0
Author-Name:  A. Denny Ellerman
Title:  New Entrant and Closure Provisions: How do they Distort?
Classification-JEL: F0
Pages:  63-76
Volume:  Volume 29
Issue:  Special Issue
Year:  2008
Abstract:  Provisions to endow new entrants with free allowances and to require 
closed facilities to forfeit allowance endowments are ubiquitous in the EU Emissions Trading Scheme, but a new design feature in cap-and-trade systems. This essay seeks to explore, within a comparative statics framework, the effect of these provisions on agent behavior in output and emissions markets assuming profit maximization. The main conclusion is that the principal effect is on capacity. The effect of the resulting over-capacity on output markets is to reduce output price and to increase output. The effect on emissions markets is more ambiguous in that it depends on the emission characteristics of the new capacity, existing capacity, and the capacity not retired, and the distribution of the excess capacity among these categories. 
Handle: RePEc:aen:journl:CW-SpEd-a05
File-URL: http://www.iaee.org/en/publications/ejarticle.aspx?id=2251
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