Interactions of a tradable green certificate market with a tradable permits market

The reduction of greenhouse gas (GHG) emissions is an important goal in the energy and environmental policies of the European Union (EU) and its member states. According to a recent directive-proposal from the EU-commission, the inclusion of renewable technologies is one of the important ways to achieve this emission reduction.

More policy instruments are on hand to pursue this objective. Frequently discussed currently is the establishing of a market for tradable permits for CO2-emissions to achieve emission reductions in the power industry. In parallel with this is the introduction of a green certificate market to promote the development of renewables.

If these two instruments are brought into play at the same time, two separate markets with two individual targets will co-exist in a number of countries. With a focus on the green certificate market, this paper discusses how these two markets may interact with each other in international trade. Three different cases are analysed: (1) A green certificate market without any tradable permits scheme, (2) a green certificate market in combination with a tradable permits scheme, based on grandfathering and, finally, (3) a green certificate market in combination with a tradable permits bidding scheme.

Emphasis is placed on analysing the pricing mechanisms in international trade at the green certificate and tradable permits market in relation to the value of the reductions in GHG-emissions actually achieved. The influence of the permits scheme on the spot market price of electricity is shown, and the benefits of trading green certificates compared to a domestic implementation of renewable technologies are discussed.

The main conclusion is that only if a green certificate market is combined with a tradable permit scheme based on a bidding procedure will trade in certificates be equivalent to the domestic development of renewables. Using the bidding system no other country will have to pay for CO2-reductions in the home country of the renewable development, as would otherwise be the case if a tradable permit system based on grandfathering were introduced or - even worse - if no tradable permits were introduced at all.

Finally, it must be stated that even if the green certificate market were introduced alongside with a tradable permit bidding system, there still would be no incentives for international certificate trade on account of the need for GHG-reductions. In the version of the green certificate market discussed in this paper no GHG-credits are attached to certificates.

This means that the development of renewables will add to GHG-reductions only in those countries, where the plants are established, no matter what kind of tradable permit scheme is adopted. (C) 2001 Elsevier Science Ltd. All rights reserved.