Enhancement of the EU ETS through “Auctions vs. Free Allocation”

To what extent can the reform of the European Union Emissions Trading System (EU ETS) improve its functioning through an auctioning system for emission allowances, as opposed to the free allocation of allowances initially provided for by Directive 87/2003?

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The auctioning system for emission allowances can significantly enhance the functioning of the EU ETS compared to free allocation for several reasons:

a) Economic Incentive: Auctions create a direct cost for emissions, thereby more strongly incentivizing companies to reduce them. With free allocation, this incentive is weaker.

b) Market Efficiency: Auctions allow the price of allowances to be determined more efficiently based on actual supply and demand.

c) Revenue for Climate Policies: Revenue from auctions can be reinvested in climate change mitigation and adaptation measures.

d) Equity: It prevents potential over-allocation and windfall profits that can occur with free allocation.

e) Application of the “Polluter Pays” Principle: It better aligns with this fundamental principle of EU environmental law.

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