Public Policy: Using Market-Based Approaches - Department for ...

Public Policy: Using Market-Based Approaches
submission of each participant’s supply curve would have allowed Defra to
construct an aggregate supply curve and hence find the quantity of reductions it
could buy by spending all its budget (£215 million), as well as the quantity of
reductions it could buy for a variety of lower budgets. With an aggregate supply
curve it would have been possible to estimate the amount of emissions
reductions that would have been lost by setting a lower budget, which would
have allowed Defra to set a budget for the scheme that would result in a lower
unit cost per tonne of emissions reductions.
It is worth noting that a ‘sealed-bid auction’ was one of the options considered
by Defra’s consultant in the auction design. However, they felt that an auction
based on sealed bids might have appeared complex and would thus have
deterred potential small participants. In additional, Defra believed that greater
flexibility over the budget might have discouraged participation and it was
important to attract enough participants in order to create an active market. 165
LOCATION PROBLEMS
This issue does not appear to be relevant to the UK-ETS or the CCP in general.
The UK-ETS and CCP are designed to address the problem of climate change
caused by emissions of greenhouse gases. The extent of climate change caused
by emissions of greenhouse gases depends on the concentration of these gases
in the atmosphere across the globe. Emissions in Europe have the same impact
as emissions in Australia, for example.
For this reason, the UK-ETS makes no distinction between emissions arising in
different locations within the UK.
LIQUIDITY
Participation in the emissions market is open to direct participants, agreement
participants and others such as traders who do not have any need to use
greenhouse-gas emission allowances themselves. This wide range of
participants increases the number of potential buyers and sellers in the
emissions market, which in turn increases the probability of a liquid market.
However, a review by NERA on the performance of the first two years of the UK-
ETS 166 found some evidence of liquidity problems during the initial years of the
scheme. According to NERA, during the first two years of the UK-ETS, 946
participants engaged in at least one trade in the market at volumes ranging from
a singe allowance to 220,000 allowances. According to the criteria used by the
study, there were a total of 1,331 trades during the first year of the scheme and
165 See NAO report (April 2004), Ibid.
166 NERA Economic Consulting (August 2004) Review of the First and Second Years of the UK Emissions Trading
Scheme, a report prepared for the UK Department for Environment, Food and Rural Affairs, Department for the
Environment, Food and Rural Affairs: London.
158