Allocation of emission allowances to effectively reduce emissions in electricity generation

A huge opportunity exists within the electricity generation industry to reduce greenhouse gas emissions, thus making a significant contribution to climate change mitigation. Under the European Union Emissions Trading Scheme (EU ETS), member countries are allocated national emission quotas which they further distribute among their individual industry sectors. Within the UK, the electricity generation industry already plays a significant role in the reduction of green house emissions. Emissions trading mechanisms should make it more attractive to build capacity in renewable and cleaner generation than buying rights to emit since more still needs to be done to reduce emissions. To achieve this it is essential that the right emission quotas are allocated for different industries. The amount of emissions to be allocated to the generation industry must therefore be consistent with the desired emissions reduction target and the current technological status of the generation mix. The allocation must also take into account the relative costs of cleaner and renewable generation technologies that are commercially available and those in developments. This paper proposes an approach for determining the emissions allocation for the generation industry to achieve a given emission reduction target. The paper draws on previous work on valuing emissions from electricity generation and building a sustainable generation mix in a competitive environment. Studies were carried out with seven generation technologies. The studies demonstrate that when compared with energy markets alone, emission trading schemes have significant influence in future generation mix and its consequential technology and generation costs as well as emission reductions. Appropriate emission allocation scheme encourages a cost-effective, sustainable generation mix to develop without distorting competition.