February 13, 2011

How Emission Certificate Allocations Distort Fossil Investments: the German Example

by Michael Pahlea, Lin Fanb and Wolf-Peter Schillc

- Despite political activities to foster a low-carbon energy transition, Germany currently sees a considerable number of new coal power plants being added to its power mix. There are several possible drivers for this "dash for coal", but it is widely accepted that windfall profits gained through free allocation of ETS certificates play an important role. Yet the quantification of allocation-related investment distortions has been limited to back-of-the envelope calculations and stylized models so far. We close this gap with a numerical model integrating both Germany’s particular allocation rules and its specific power generation structure.

Pahlea, M., L. Fanb and W-P Schillc (2011). "How Emission Certificate Allocations Distort Fossil Investments: the German Example." DIW Berlin Discussion Papers No. 1097, Jan 2011.