When it was launched in 2005, the European Union emissionstradingsystem (EU ETS) was projected to have prices of around €30/ton CO2 and to be a cornerstone of the EU’s climate policy. The reality was a cascade of falling prices, a ballooning privately held emissions bank, and a decade of low prices providing inadequate incentive to drive investment in the technologies and innovation necessary to achieve long-term climate goals. The European Commission responded with administrative measures, including postponing the introduction of allowances (backloading) and using a quantity-based criterion for regulating future allowance sales (the market stability reserve); although prices are beginning to recover, it is far from clear whether these measures will adequately support theprice into the future. In the meantime, governments have been turning away from carbon pricing and adopting overlapping regulatory measures that reinforce low prices and further undermine the confidence in market-based approaches to addressing climate change. The solution in other carbon markets has been the introduction of a reserveprice that would set a minimum price in allowance auctions. Opponents of an auctionreserveprice in theEU ETS have expressed concern that a minimum auctionprice would interfere with economic operations in the market or would be tantamount to a tax, which would trigger a decision rule requiring unanimity among EU Member States. This Article reviews theeconomicandlegal arguments forand against an auctionreserveprice. Our economic analysis concludes that an auctionreserveprice is necessary to accommodate overlapping policies andforthe allowance market to operate efficiently. Our legal analysis concludes that an auctionreserveprice is not a “provision primarily of a fiscal nature,” nor would it “significantly affect a Member State’s choice between different energy sources.” We describe pathways through which a reserveprice could be introduced.
The CGE literature has neglected participation thresholds, leaving the issue for discussions among lawyers and lobbyists. We are not aware of any CGE simula- tions that address the issue. In contrast, CGE modelers have intensively looked at the question what share of emission permits should be auctioned. Most publi- cations emphasize the existence of windfall profits from grandfathering and con- trast them with positive welfare effects of auctioning when revenues are recycled such that overall efficiency increases, see e.g. Edwards and Hutton (2001) forthe UK, Goulder et al. (2010) forthe USA. Jensen and Rasmussen (2000) show the same qualitative results for Denmark, but also underline forthecase of full auctioning the high adjustment costs in energy-intensive industries e.g. in terms of stranded investment. It is thus important to consider both sectoral effects and economy-wide welfare effects.
The policy-event dummies give us some evidence, although limited, that regulatory uncertainty might play a role in price forma- tion. This ﬁnding, if conﬁrmed, would imply different reform options than the ones merely aimed at adjusting to short-term shocks (e.g. due to economic downturn or large renewable deployment). Such reform options should seek to stabilize the expectations of market partici- pants. From this perspective, two types of approaches are discussed in the literature: (i) reducing policy uncertainty and (ii) decreasing the long-term commitment problem ( Brunner et al., 2012 ). The former induces for instance the establishment of mid- to long-term legally binding CO 2 emissions reduction targets. The current debate is focusing on the 2030 targets but to ensure long-term cost effective- ness, it might be necessary to provide to market participants a long- term decarbonization pathway. Nonetheless, as discussed in Grosjean et al. (2014) such a strategy might not be suf ﬁcient to bring the necessary level of stability to the expectations of market participants. Tackling the long-term commitment problem in order to stabilize expectations is a delicate task. In monetary policy, the experience has favored delegation in setting the money supply as a tool to overcome the problem ( Barro and Gordon, 1983; Kydland and Prescott, 1977; Rogoff, 1985 ). In the context of the reform of theEU ETS, one could foresee the delegation of the governance of the carbon market to an independent authority whose goal would be to ensure that the short-term EUA price is in line with long-term target (e.g. Clò et al., 2013; de Perthuis and Trotignon, 2013 ). However, this will not be without dif ﬁculties. The exact mandate of this institution as well as the instrument used to achieve its goal will not be easily de ﬁned ( Grosjean et al., 2014 ). Nonetheless, what an independent authority may achieve is a smoother decision-process for making reforms as well as locating the decision outside of the political sphere ( Newell et al., 2012 ). This might create more stable expectations on the way decisions are taken over time, even if the goals are modi ﬁed to adapt to new information and circumstances.
In general, a policymaker’s mandate is primarily dictated by the specific objectives of thesystem it regulates (e.g. to achieve a certain level of emissions reduction with or without also defending a price interval). Ultimately, however, the policymaker’s role is to ensure that its cap-and-trade system enables compliance entities to meet their obligations at minimum costs. Economic theory provides insights into how systems can be designed to facilitate cost minimisation. For example, several studies have explored the effect of banking and borrowing pro- visions as cost ‘smoothing’ mechanisms ([Rubin, 1996], [Schennach, 2000], and [Fankhauser and Hepburn, 2010] for a comprehensive overview of the literature). However, these mechanisms alone may not be sufficient when the market is faced with severe uncertainty. In the presence of this market uncertainty, current investment decisions are harder to make and as a consequence, long-term abatement may occur at higher overall costs. The policymaker’s challenge thus quickly amplifies once markets are recognised as inherently unstable. Further- more, the drivers of market uncertainty are hard to untangle andthe impacts of such uncertainties are no easier to control. Notwithstanding, it is possible to design policy mechanisms that can help mitigate these impacts in a way that a non-intervention policy design (such as temporal provisions) alone could not achieve. In the language of [Minsky, 1986], institutions and regulations can be designed to constrain instability.
COMPUTATIONAL STRATEGY.—– Based on Mathiesen ( 1985 ) and Rutherford ( 1995 ),
we formulate the model as a mixed complementarity problem (MCP). We formu- late the model as a system of nonlinear inequalities and represent theeconomic equilibrium through two classes of conditions: zero profit and market clearance. The former class determines activity levels andthe latter determines price levels. In equilibrium, each of these variables is linked to one inequality condition: an activity level to an exhaustion of product constraint and a commodity price to a market clearance condition. Importantly, the complementarity-based formulation of our numerical model enables us to endogenously represent corner solutions in equilibrium; for example, as will become evident below, it is important to ac- count forthe possibility of “unbinding” national (non-ETS) carbon markets with zero carbon prices. Numerically, we use the General Algebraic Modeling System (GAMS) software andthe higher-level language MPSGE ( Rutherford , 1999 ) andthe PATH solver ( Dirkse and Ferris , 1995 ) to solve the MCP problem.
The existing energy system is likely to remain largely the same in the short run due to long investment planning and operation cycles. This means that technological change takes its time to translate into changes in the carbon price. Facing a trade-off between technological level of detail (mostly PE mod- els) and broad coverage of sectors at a level disaggregated enough for a meaningful analysis with en- dogenous GDP (mostly CGE and econometric models), one should favour a disaggregated sectoral cov- erage. The latter models have the further advantages that they take interaction and interdependences between all sectors into account (i.e. interdependences in production and MACC between ETS- and non-ETS-sectors) CGE models and econometric models are hence very useful to analyse short-term effects of linking when technologies do not change significantly (Hedenus et al. 2012, p.2). However, if partial effects or technological details are of interest, CGE modelling might be complemented with PE models, for example in a case where dynamic changes in technologies such as an increased share of renewable energies would be not covered in an CGE.
aspects. 8 This represents a trade-off between broad coverage of emissionsandthe avoidance of large MRV transaction costs per unit of emissionsfor some regulated companies.
A possible way to decrease transaction cost burdens while preserving effectiveness and broad coverage of regulation would be a strict ‘upstream’ policy design (Joas & Flachsland, 2014; Kerr & Duscha, 2015). In theEU ETS, regulation takes place at the installation level in an ‘end of the pipe’ manner. This makes the inclusion of small installations necessary. Under upstream regulation (as interpreted here), the carbon content of intermediate products (e.g. fossil fuels) is ‘priced’ by the upstream regulation system in the moment the products are put on the market (Kerr & Duscha, 2015). In this case, greenhouse gas emissions are ‘priced’ at the source and not at the level of final (commercial) consumers. In this situation, the overall prices of carbon- intensive intermediate products incorporate the carbon price in casethe products are resold. Such
14 allowances in circulation” (Decision (EU) 2015/1814, 2015, L 264/2), which is also called “bank” in the literature as it refers to the allowances that are currently unused and “banked for future use” (Perino, 2018, p. 263). Specifically, when there are more than the upper threshold of 833,33 million 2 allowances in circulation on the 31 st December of a particular year, then in the following year, the number of allowances which are auctioned is reduced by 24 % of the number of allowances banked and these allowances are placed in the MSR (Decision (EU) 2015/1814, 2015; Directive (EU) 2018/410, 2018). After 2023, a rate of 12 % instead of 24 % applies (ibid.). To be more precise, “[i]f the bank, […], exceeds 833 million at the end of a given year (in 2017 or later), then the number of allowances auctioned in the 12 months following October of the following year (but not before January 2019) is reduced by a certain percentage of the size of the bank” (Perino et al., 2020, p. 27). However, although this is more precise and should be kept in mind, forthe sake of simplicity, in the following the formulation is used that the intake of al- lowances into the MSR depends on the bank of the previous year, since this version is also predominantly used in the literature (e. g. Bocklet et al., 2019; Gerlagh et al., 2019; Perino, 2018; Rosendahl, 2019a; Tietjen et al., 2019). This continues each year until the allowances in circulation are less than 833,33 million (Decision (EU) 2015/1814, 2015). If they fall even below the lower threshold of 400 million allowances, in each following year, 100 million allowances are released, i. e. they leave the MSR and are added to theauction volume (ibid.). This is done until thereserve is empty, i. e. if there are less than 100 million allowances in the MSR, all remaining allowances are released (ibid.). With this, the MSR would only delay the supply of allowances andthe long run cap would be unaffected (Kollenberg & Taschini, 2019; Perino & Willner, 2015, 2016, 2017, 2019). But as an essential additional rule, the cancelation mechanism was adopted in 2018: From 2023 onwards, the MSR has an upper limit which corresponds to the total number of allowances auctioned in the previous year. This means that the number of allowances corresponding to the difference between the number of allowances in the MSR before andthe number of allowances auctioned in the last year lose their validity, i. e. get canceled each year (Directive (EU) 2018/410, 2018). Therefore, the cap of theEU ETS is no longer fixed but endogenous and a result of the market outcome (Beck & Kruse-Andersen, 2020;
If auction revenues are used to support RE and reduce the levy, the distortionary effect is diminished and there is a relative GDP improvement (-0.1% GDP loss instead of 0.2%). The ETS price rises (+1.6% if no levy exemption applies, +1.8% if ETS sectors are exempted) as a result of the higher electricity demand, but a reduction of the climate constraint (−4.6% if no levy exemption applies, −5.9% if ETS sectors are exempted) is observed in the non-ETS sectors, which can use more electricity. The impact on each economic sector is a combination of three effect: a positive income effect associated with the electricity levy reduction forthe industrial electricity consumers, a loss induced by higher energy and carbon prices forthe most energy intensive sectors, an increased demand from the whole economy. Forthe non-ETS sectors, the outcome is either balanced or positive but, in all cases, small. The impact on the ETS sectors depends on the exemption rules. If they have to pay the electricity levy, the recycling of theauction revenues to support RE results in a positive income effect for them and leaves them better off. On the contrary, if the ETS sectors are exempted, the use of auction revenues to subsidize renewable electricity generation leaves the most energy intensive ones worse off. Despite an increase in the demand from the non-ETS sectors that have to pay the electricity levy and are better off when the latter is reduced (e.g. demand for fertilizers by the agricultural sector), some of the ETS sectors that benefit from a levy exemption see their benefit from the exemption reduced due to increased carbon and energy prices. That is for example thecase of the cement, iron and steel, glass, and aluminium sectors.
demand on markets. Reduction efforts by companies are not defined by the regulating authority as under a command and control regime. Hence, liquid and transparent markets are of great importance. Transparency in markets (about prices and traded volumes) is beneficial as it provides information to all market participants. In the US SO2 trading program, prices for private transactions were unknown to others and hence assessing a “fair” price was accomplished with relatively high informational costs. The market was not very liquid meaning that finding a potential seller/buyer was accomplished with search costs. These factors lead to relatively high transaction costs in general and hampered the efficient exchange of permits andthe efficiency of theemissionstradingsystem as such. Since theprice is generated at primary auctions or sells (initial permit allocation by authority) and at secondary markets (exchanges over the counter trade), liquidity and transparency within the market is crucial for minimizing transaction costs and facilitating efficient exchange of permits. Allowing intermediaries to be active in permit trading can play a crucial role here. Also markets for machinery and equipment to achieve emissions reductions can be of importance. While in thecase of SO2 trading, retrofitting of existing plants to reduce emissions was relatively easy, technical solutions forthe reduction of CO2 are more complex because of the non-existence of end-of-pipe technologies for CO 2 emissions. If markets for energy efficient machinery and equipment are sticky, transaction costs can hamper the effective transformation of the economy (Heindl, 2011).
none of them doubted the effectiveness of the fundamental design of theEU ETS and did not aim to abolish and replace it with another instrument.
The policy process of theEU ETS revision was shaped by the then forthcoming UN climate conference in Copenhagen andthe oil and gas concerns of the new EU member states of Eastern and Central Europe. As a consequence, theEU ETS Directive became part of a newly implemented climate and energy package. Four other directives were also part of this package and were negotiated in parallel. Moreover, the then forthcoming climate summit in Copenhagen caused a sped up policy process. This meant that the Commission‟s proposal did not have to pass all stages of the co-decision legislative procedure. Furthermore, the European Council participated in the process, something that is very uncommon. On the one hand, this had the positive effect that the revision was highly supported by the heads of the member states. However, on the other hand, the Commission‟s proposal was in a way watered down andthe Parliament‟s opportunities to influence the policy making process were weakened. Theeconomicand financial crisis considerably changed the attitudes of the actors. During the time of the negotiations about the climate and energy package, the support for climate policy was very high, something that significantly changed with the crisis. Economic issues became the highest priority on the political agenda and other political issues were delayed. This was also thecasefortheEU ETS, whose ineffectiveness became clear. Theeconomic crisis had led to an automatic reduction of emissionsand thereby an oversupply of allowances and a decline in their prices. Moreover, the crisis resulted in a greater split between the member states of Northern and Western Europe andthe member states of Central, Eastern and Southern Europe. Furthermore, the crisis created a feeling of disappointment around environmental politics as the ineffectiveness of the revised EU ETS became visible. Although theeconomicand financial crisis in theEU can be considered as being caused by neoliberal policies, this did not lead to a turning away. TheEU tried to counteract the crisis with further neoliberal instruments. This was also thecase when dealing with the problems of theEU ETS, as further neoliberal measures will be added to it.
The beforementioned changes in prices will naturally bring about some changes in the distribution of income in the economy. Samuelson’s factor price equalization theory suggests that after opening to trade, the relative prices of goods in participating countries should adjust. Same story could be applied to linking emissionstrading schemes. The allowance price will increase in one system but decrease in the other. As a result of such price convergence, buyers from an ETS with a higher pre-link permit priceand sellers from an ETS with a lower pre-link permit price will be better off, while buyers from a lower pre-link ETS and sellers from a higher pre-link ETS will be worse off (Haites 2016). Furthermore, the change in allowance price will affect theprice of energy or price of emissions-intensive goods which will in turn affect households or other non-participating firms that rely on such goods as inputs in their production. Such changes in production costs could also affect these firms’ competitiveness. Consequently, it can be said there will be winners and losers, even though we observe overall cost savings (Jaffe and Stavins 2008), (Flachsland et al. 2009). By using a large-scale computable general equilibrium (CGE) model, Alexeeva and Anger (2016) have analyzed the macroeconomic and trade-based competitiveness impacts of linking theEU ETS with another ETS in four different scenarios, the first (EU scenario) is the no linking scenario and others (EU+, EU++ andEU+++) being only different in how many countries join. The results showed reduced welfare costs from emissions regulation for both EU members and non-EU states, however for non-EU members the gains decrease as more members join (see Table 4). The assessment of international trade effects showed different results. By linking with another ETS, theEU members have improved their terms of trade, while the non-EU members faced a loss in competitiveness, as seen in Table 5. They attribute these results to different roles of EUand non-EU members in the linking agreement, by theEU being permit importers andthe rest being permit exporters which is due to different (initial) carbon prices in different regions. Lower permit prices translate to decreased abatement costs and make the production and exports of theEU ETS participants cheaper in relation to imports from non-EU regions.
Furthermore, some ‘dirty’ ﬁrms may have faced such high environmental costs from theEU ETS that they had to exit the market. Similarly, multinational corporations with production units could delocalize their production outside theEU. In the end, only ﬁrms who were competitive in a clean environment could have kept their business running. In the aggregate, this would result in a more productive and cleaner business environment. This may explain ﬁnding no negative competitiveness eﬀects on ﬁrms that have stayed in the market. If ﬁrms or subsidiaries exit the market in order to relocate to places where environmental regulation is less restrictive ( ‘pol- lution havens ’), this is called the Pollution Haven Hypothesis (PHH; e.g. see Cole, 2004; Eskeland & Harrison, 2003; Kozluk & Timiliotis, 2016; Millimet & Roy, 2011; Wagner & Timmins, 2008; Yoon & Heshmati, 2017). In thecase of theEU ETS, the PHH is supported if signi ﬁcant evidence of carbon leakage attributable to theEU ETS is established. If ﬁrms were to start emitting more once relocated, we could observe an increase in total emissions worldwide, making theEU ETS an ine ﬀective mechanism. No empirical evidence of carbon leakage or ﬁrm closures attributable due to theEU ETS has been documented so far. Preliminary results using emissions data by Dechezleprêtre, Gennaioli, Martin, and Muûls (2014) and Wagner et al. (2014) ﬁnd no supportive evidence for carbon leakage within companies which have non-treated plants during Phase II. Besides emissions, indirect measures of carbon leakage may be used. While short-term leakage is usually detected through increased imports, long-term production relocation may be analysed through outbound foreign direct investments (FDI, see Koch & Basse Mama, 2016). Several trade ﬂow analyses show that the carbon price level did not lead to any signi ﬁcant carbon leakage in the European primary aluminium sector (Sartor, 2012), in the cement and steel sectors (Boutabba & Lardic, 2017; Branger, Quirion, & Chevallier, 2017) or in manufacturing sectors 11 (Naegele & Zaklan, 2017). Focusing on German and Italian multinationals, respect- ively, Koch and Basse Mama (2016) and Borghesi, Franco, and Marin (2016) show that theEU ETS did not lead to relocation through outbound FDI forthe average ﬁrm. However, both studies reveal that particular sub-groups of enterprises did signi ﬁcantly react to theEU ETS stringency. Still, overall, the scarce evidence so far shows no evidence of carbon leakage forthe average ﬁrm, and thus contradicts the PHH.
TheEUEmissionsTradingSystem (EU ETS) is the world’s largest carbon market andthe EU’s ﬂagship tool to combat climate change. The launch of this transboundary carbon tradingsystem marked a severe tightening of environmental regulation in a uni- lateral way: Starting in the year 2005, EU ﬁrms in energy and manufacturing industries faced a strict cap on their total amount of greenhouse gas emissions while the perspec- tive for a widespread implementation of comparable regulations in other regions of the world was uncertain. Even though a number of regional and experimental carbon trad- ing programs were started subsequently to theEU ETS, these regionally or temporally conﬁned initiatives did not alter the unilateral character of theEU ETS in comparison to the substantially lower stringency of climate change policies outside of Europe. Against this backdrop, concerns about potentially negative competitiveness impacts on regulated businesses under theEU ETS were voiced from its inception and have not died out since. The concern that unilateral environmental regulations might impose signiﬁcant costs, divert resources from productive activities and ultimately put the international com- petitiveness of regulated ﬁrms at risk is widespread among economists, policymakers and industry representatives. In case of a persistent international asymmetry in the stringency of environmental regulation, the pollution haven hypothesis is that aﬀected businesses may move production capacity to countries that impose a lighter regulatory burden. In the context of climate change policies, such a shift creates “carbon leakage”, since theemissions would move together with the relocated production. In this scenario, the uni- lateral environmental policy backﬁres economically and ecologically, combining a loss of economic activity in industrial sectors with, at best, environmental ineﬀectiveness, or worse, an outright negative eﬀect if production outside of the regulated area is carried out in a more carbon intensive way. Such a process would manifest itself in the form of an erosion of the regulated ﬁrms’ asset bases in Europe.
► Market Stability Mechanisms: Key determinants of price levels have been and will likely remain the long-term target set by the declining cap and market stability mechanisms. As mentioned in section 2.1.5, prices settling at or near the floor were highly likely from the outset of the program, the impact of complementary policies, and low price-responsiveness of abatement (Borenstein et al., 2019). These factors have elevated the importance of California’s market stability mechanisms in managing volatility and have largely done so successfully, as prices have increased gradually, largely in step with the rising AuctionReservePrice. The effectiveness of California’s complementary policies for key sectors, including renewable portfolio and low-carbon fuel standards, will also continue to play a strong role in the system’s long-run price trajectory. To conclude, the CaT system provides evidences that a price corridor, in particular in conjunction with complementary policies (which decrease the demand for allowances), has a strong tendency to decrease short-term price volatility, as the floor supports prices at thereserveprice.
national mitigation policies in order to achieve their more ambitious domestic mitigation goals. However, reliance on domestic policy instruments would create an inefficient pattern of regulation across theEUand would add to the factors working towards reducing the EUA price. TheEU ETS is embedded in a multi-level governance structure, with Member States having diverging preferences over their technology mix and level of climate policy ambition. TheEU ETS is not the only instrument for climate and energy policy, but based on the national sovereignty of the energy mix, Member States can implement additional measures, such as renewable support schemes, energy efficiency measures, or additional domestic carbon prices (UK) that interact with theEU ETS. This is likely to intensify asymmetries in marginal abatement costs across Member States and thus increase overall policy cost. In addition, these policies also do only reallocate but not on net reduce emissionsand can add to an even stronger reduction of the EUA price by exogenously reducing the allowance demand through channels identified in section 2.2, thus intensifying the problems of theEU ETS. At the same time, given the differences in envisaged levels and timing of climate policy targets across Member States, the question arises as to whether theEU ETS can be adjusted to help guide these divergent national preferences towards mutually beneficial outcomes. These points are revisited in the discussion of reform options in the next sections.
instead purchase allowances. In the past years, the allow- ance price ranged between €6 and €9. This relatively low price is mainly attributed to a huge surplus of allowances in the market. A surplus emerges if the cumulated number of allowances exceeds the (veriﬁ ed) actual emissions. There are manifold reasons forthe huge surplus of excess allowances. One reason is the unexpected low emission levels as a consequence of the longstanding and se- vere economic crisis that erupted in 2008. Most notably, Southern European countries have been strongly afﬂ icted by the crisis and have not yet recovered economically. Another reason is the generation of green electricity in Europe. Both the Commission and individual member states deﬁ ned targets forthe shares of green electricity in consumption and established promotion schemes that overlap with the ETS. In Germany, for instance, the gen- eration of CO 2 -free electricity, which is promoted by ﬁ xed feed-in-tariffs for renewable energy sources (RES), leads to a decreased demand for emission allowances in the German power sector. This is illustrated in Figure 2 by a shift of the demand curve from D 0 to D 1 .
Alternatives to the Market Stability Reserve
RWI Position #65, May 28, 2015
In the light of persistently low prices for allowances, there is much debate about refor- ming theEUemissionstradingsystem. Based on a proposal of the European Commission, theEU plans to introduce the so called Market Stability Reserve in 2019: a mechanism that regulates the amount of allowances within the market by temporarily taking some of the allowances into a reserve. The Commission thereby aims at reducing the surplus and securing a higher market pricefor allowances. An alternative reform proposal is the introduction of a minimum price. This RWI position puts forward a third alternative: retaining theemissionstradingsystem in its original form and reducing the surplus by a one-time adjustment. In 2014, 900 million allowances from the years 2014 to 2016 were back-loaded to be auctioned in the years 2019 and 2020. Instead, these allowances should be deleted. Furthermore, if necessary, the amount of allowances could be constantly decreased by reducing the cap more strongly than planned. Compared with the other reform options, retaining theemissionstradingsystem in its original form has two major advantages: first, politically driven interventions are minimized and, second, free market prices exhibit a stabilizing effect for fluctuations caused by the business cycle.
Non-participating countries may think it is unfair of theEU to unilaterally enforce an emission cap that affects their trade. However, other Annex 1 countries have little reason to complain as they have been asked by the UNFCCC to take action together with the IMO. It is their inaction that is forcing theEU to establish a regional scheme. Non-Annex 1 countries may have better grounds for complaining. However, one should in this respect remember that the ships covered by the scheme are in most cases involved in dedicated trade between non-Annex 1 countries and Member States of theEU, and those ships cause as much pollution on their return voyage as on their trips to Europe. It is also important in this context to recall that in 2004, the eight largest Chinese ports accounted for over a quarter of the world’s container traffic (ISL, 2005). This trade is a result of commercial deals which result in both consumer and producer surpluses. Finally, one should note that it is proposed that the majority of the proceeds from the scheme be recycled to the industry on the basis of GT kilometres sailed. Therefore the net burden forthe average ship will be small, although high-emitting ships will, of course, have to pay considerably more than they receive back.
Second, I model theauction as a strategic market. It has been established both theoretically and empirically that uniform-price auctions create incentives for demand reduction, even if the number of bidders is large. For instance, Milgrom (2004, p. 262) argues that even when the bidders are small relative to the market, there can be equilibria in which prices settle far below the competitive price. This result has been ﬁrstly pointed out by Wilson (1979) who showed that the uniform priceauction can have equilibria which result in signiﬁcant reduction of the revenue to the auctioneer, regardless of the number of bidders or their attitude towards risk. Moreover, Ausubel et al. (2014) emphasize that when bidder’s marginal utility is decreasing, the seller will not be able to extract the whole surplus, even when the number of bidders approaches inﬁnity. Finally, evidence of demand reduction in uniform-price auctions is also present in experimental studies (Ausubel et al. 2014, Burtraw et al. 2009). Therefore, my model accounts for demand- reduction incentives, which, in fact, ensures the generality of the equilibrium, as one can always recover the competitive equilibrium by letting the number of bidders grow large. It is, thus, clear from the outset that the diﬀerential demand reductions stemming from bidders asymmetries will lead to ineﬃcient allocations in theauction.