How should greenhouse gas permits be allocated in the EU?

The European Union (EU) Commission has adopted a Green Paper to prepare the introduction of greenhouse gas (GHG) emissions trading as a potential tool for climate change policy within the EU. When similar action was undertaken in the US Acid Rain Program in the beginning of the 1990s, the most controversial feature was that of initial allocation of permits. However, in the EU context, the political and economic implications have not been discussed in detail yet. Therefore, our contribution is to focus on a politically feasible allocation method by considering how these GHG permits should be allocated at both the national and at the power plant level. Our policy recommendation is twofold. First, a proportional rollback of the emissions defined by the Burden Sharing Agreement is a suitable starting point concerning allocation at the national level. Second, a common grandfathered distribution principle, such as an allocation of permits to individual power plants based on a percentage reduction of the current size of emissions, is to be preferred over an allocation principle based on past emissions.