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Public Policy: Using Market-Based Approaches MARKET POWER As previously mentioned, direct participants, agreement participants and other traders are all allowed to trade in the emissions market. This range of potential participants increases both the number of participants and the number of sectors or industries participating in the market, which helps to improve market liquidity and reduce the likelihood of market power problems. The UK-ETS covers emissions of all six greenhouse gases. The same allowance can be used to meet a target for emissions of any greenhouse gas (with set ‘exchange rates’ between different greenhouse gases to reflect their differing impacts on climate change). A firm that emits methane can trade with firms that emit carbon dioxide or nitrous oxide, for example. This market widening can also limit the extent to which firms can exercise market power within the scheme. Additionally, under the scheme rules, participants were prevented from gaining more than 20 per cent of the incentive fund in the initial auction, which reduced the amount of allowances they were able to hold and thus their ability to manipulate the price of allowances. The overachievement by the biggest participants (see below) has led to some of these direct participants holding a very large number of allowances. However, the observed movements in prices suggest that the presence of market power is unlikely. Prices have, on average, fallen since the launch of the program in 2002, and the price increases in the beginning of the UK-ETS can be explained by a lack of market liquidity due to delays in the verification process rather than the existence of market power. Outcome of market mechanism The UK-ETS has three main objectives, which were presented as being of equal importance: ● to secure significant reductions in greenhouse gas emissions in the UK in a cost-effective manner, i.e. minimising the costs of emissions reductions for the UK economy as a whole; ● to provide UK companies with early experience of emissions trading, in preparation for European and international emissions trading schemes; and ● to promote the establishment of the City of London as a centre for emissions trading. 160
COST-EFFICIENT EMISSIONS REDUCTIONS Section 11 – Emissions Trading According to Defra, emissions reductions within the scheme have exceeded expectations with both direct participants and climate change agreement holders going well beyond their targets for future years of the scheme. 169 During the first year of the UK-ETS, direct participants, in aggregate, surpassed their targets for that year by 487 per cent and reported reductions of 4.64 million tonnes. 170 In other words, the reductions in emissions in the first year alone exceeded the target for reductions over the whole five-year life of the scheme by 17 per cent. Since participants have the option of selling the allowances or ‘banking’ them for later use, the final impact of the reductions in the initial year are uncertain at present. Economic theory would suggest that the total volume of allowances available in the market will determine the total level of emissions produced over the life of the scheme. Given that participants can bank allowances and use them in later years, it may be that participants use the allowances they have banked to increase emissions in the later years of the scheme. This outcome might be the case if direct participants reacted to the price achieved in the initial auction (£18 per tonne per year) and calculated that at this price it would be profitable for them to reduce emissions by more than their target and sell the excess allowances generated at this market price. Since the market price is now much lower than this level, direct participants may in future years find it less profitable to reduce emissions and their emissions might therefore be expected to rise. A more likely outcome perhaps, is that direct participants will use some of their banked allowances to cover their own emissions in future years and sell the others to agreement participants who will then be able to exceed their targets. This outcome would counteract the overachievement of direct participants in the first year of the scheme so that the total level of emission reductions achieved through the initial auction might not exceed 3.96 million tonnes over the life of the scheme. However, such an outcome might suggest that the scheme has succeeded in achieving emission reductions in a cost effective manner, since it would suggest that direct participants are able to reduce emissions at a lower cost, on average, than agreement participants. (It would seem reasonable to expect that direct participants in the UK-ETS will have relatively lower emissions reduction costs than other firms in the UK economy, otherwise it would not have been rational for them to have entered ‘winning bids’ in the initial auction.) It has been suggested in some press reports that the goals set for some of the direct participants were undemanding and that some of the companies’ targeted levels of emissions were below their actual baselines. 171 On the other hand, Defra 169 Third Annual Workshop on Greenhouse Gas Emission, 23-24 September 2003, ‘Country Summary: U.K Emissions Trading Scheme’, available at: http://www.iea.org/textbase/work/2003/ghgem/uk.pdf. 170 Report by the Comptroller and Auditor General (April 2004) The UK Emissions Trading Scheme: A new way to combat climate change. National Audit Office. 171 See NAO report, Ibid. 161
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DTI ECONOMICS PAPER NO.14 Public Po
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DTI ECONOMICS PAPER NO.14 Public Po
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Contents Acknowledgements vi Forewo
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Contents Section 11 Emissions Tradi
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Foreword There is increasing intere
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SECTION 1 Introduction and summary
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Public Policy: Using Market-Based A
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SECTION 2 Using market mechanisms U
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SECTION 3 Lessons for the design an
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SECTION 4 Introduction This part of
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SECTION 7 Market-Based Mechanisms W
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SECTION 8 Framework for assessing m
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Part IV Case Studies 73
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● the Green and White papers behi
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A prison failing to deliver on its
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Table 9.3 Companies providing priso
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Section 9 - Competitive Tendering o
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detect any deviation from a collusi
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at HMPS began as an equal mix of th
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(e.g. lighting). This impact could
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MARKET POWER The full benefits of c
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However, it should be noted that te
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on competition is uncertain. The ab
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Controlling for problems of asymmet
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Procurement process design One way
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however, financial deductions are m
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Section 9 - Competitive Tendering o
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The Independent Monitoring Board at
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Figure 9.1: Difference between the
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‘While there were staff in the pu
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Page 121 and 122: and demand conditions. Second, we d
Page 123 and 124: DEMAND Anyone can apply to a local
Page 125 and 126: ● Rent deposit guarantee by the l
Page 127 and 128: The Green Paper stated the Governme
Page 129 and 130: It was not an objective of ODPM or
Page 131 and 132: DESCRIPTION OF MARKET MECHANISM The
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Page 135 and 136: DEVELOPMENTS OVER TIME The major mo
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Page 139 and 140: from those already located within t
Page 141 and 142: In several areas, registrations by
Page 143 and 144: Controlling for information problem
Page 145 and 146: extent though, it was competition b
Page 147 and 148: Section 10 - Choice-Based Letting i
Page 149 and 150: levels are reducing and new tenants
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Page 161 and 162: A more detailed and diagrammatic de
Page 163 and 164: The costs of monitoring and reporti
Page 165 and 166: INITIAL ALLOCATION OF PROPERTY RIGH
Page 167: only 242 in the second year. The di
Page 171 and 172: consultants to Defra of £11 per to
Page 173 and 174: Participation has helped us to rais
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Page 178 and 179: SECTION 12 Issues in the implementa
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Page 212: Printed in the UK on recycled paper
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