Justin Dargin, How To Structure The Initial Allowance Disbursement

By Author: Justin Dargin
Total Articles: 4
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To establish a legitimate CaT system, it is necessary to first promulgate the required cap on overall emissions levels, and then allocate the emission allowances so that the market can begin to operate. The allocation of emissions allowances is one of the most contentious aspects of a carbon emissions platform, because it portends enormous consequences for future financial viability and firm competitiveness.

There are two main methods for allocating emission allowances to market participants. Either an auction may be convened to enable emitters to bid for the initial tranche of allowances, or the regulatory body may disburse them at no charge to an initial cohort of market participants. Some combination of the two previous methods may also be utilized. If the regulatory body decides to grandfather existing emitters into the scheme, it must determine the metrics for the initial disbursement.

Each method presents advantages and disadvantages for the firms involved, even though the method of allocation makes little impact—as long as there is a credible baseline—on the ultimate analysis of whether the market functions ...
... or if environmental benchmarks are achieved.

The business community generally considers the gratis allocation of emission allowances as the most acceptable method of initiating a carbon emissions scheme; furthermore, its implementation tends to be relatively simple from a regulatory standpoint. One major criticism is that it may create high entry barriers for new businesses in the sector. In this scenario, new entrants would be obliged to purchase a set of allowances, even though earlier competitors were basically grandfathered into the system. One potential way to overcome this challenge is to create an allowance set-aside for later entrants as well. This would provide a set of no cost allowances for new competitors, and mitigate concerns as to favoritism. However, there remains the risk that a free initial disbursement could contravene WTO rules under the Subsidies and Countervailing Measures (SCM) Agreement.

If a free allowance scheme is adopted to assist a few targeted industries under the auspices of an all encompassing CaT scheme, a danger exists that the free grant of allowances could be considered an actionable subsidy under the SCM Agreement. In order to reduce this possibility, an understanding could be negotiated in the WTO, whereby if non-Annex 1 countries adopt binding carbon caps, they would be allowed to adopt a one-off “green light” free allowance disbursement to selected carbonintensive industries.

With an initial auction allowance, whereby all entrants (new and old) are charged, new entrants would not confront a competitive disadvantage vis-à-vis older firms, because all participants would be on equal footing. Even in the midst of the global economic crisis and the liquidity freeze, governments would have the ability to raise additional budgetary revenue. Of course, few businesses find this procedure an acceptable method of allocation, as some consider it a hidden tax. However, the proponents of the system argue that an initial auction allowance reduces tax distortions, provides greater incentives for technological innovation and avoids quarrels over the distribution of rents.

Due to the competitiveness issues inherent in the allocation method, a regional bloc such as the
GCC, with members that have robust trade linkages and similar economic sectors, would ideally select a single allocation method. If two or more countries initiate different types of allowance disbursements, serious competitive disadvantages could result between the respective industries.

Justin Dargin is a Research Fellow with The Dubai Initiative and a Fulbright Scholar of the Middle East. Justin Dargin is a specialist in International Law and Energy Law, and a prolific author on energy affairs.