Week 5
Q1: Which of the following approaches is primarily used to allocate allowances from Phase 3
onwards in EU-ETS?
a) Grandfathering
b) Benchmarking
c) Auctioning
d) None of the above
Hint: From Phase 3 onwards, allocation of allowances has been done largely through
auctioning instead of free allocation of allowances.
Q2: Which of the following statements is true about EU-ETS?
a) Banking of allowances was restricted in Phase 1
b) Banking of allowances was restricted in Phase 1 and 2
c) Banking of allowances was restricted across all the phases
d) Banking of allowances was allowed across all the phases
Hint: The banking of allowances was restricted in Phase I but in further phases this restriction
was removed.
Q3: Which of the following is true about the demand and supply of allowances in EU-ETS?
a) MSR may affect the supply of allowances.
b) Demand for carbon allowances remains fixed.
c) Provision of banking and borrowing can affect the demand for allowances.
d) Both a and c
Hint: Demand for carbon allowances depends on various factors like weather, energy
consumption, policy uncertainties, etc. Also, banking and borrowing can also affect the demand
for allowances. MSR may affect the supply of permits in circulation.
Q4: Which of the following statements is/are true about carbon taxes?
a) It provides certainty on emission level reductions.
b) The carbon prices are set by predefined tax rates.
c) The carbon prices are determined by market forces.
d) Both a and c
Hint: Under carbon taxation, carbon prices are set by predefined tax rates whereas under ETS
prices are determined by market forces.
Q5: In case of free allocation of permits to the covered installations, which one of the following
best describes the impact of under allocation of permits to the covered installations on carbon
prices (ceteris paribus, i.e., all else remaining the same).
a) Rise in carbon prices
b) Decline in carbon prices.
c) No change in carbon prices
d) No change in participated firms’ stock prices
Hint: Under allocation of carbon permits leads to high demand for allowances, leading to a rise
in carbon prices.
Q6: Two manufacturing companies A and B both emit 150,000 tonnes of CO2 per year and
each entity is given 140,000 emission allowances. One allowance represents the right to emit
one tonne of CO2. So, neither company is fully covered for its emissions. They can either
reduce their emissions by 10,000 tonnes or purchase 10,000 allowances in the market. The
allowance market price is EUR 15.00 per tonne of CO2. Company A’s reduction costs are EUR
10.00 and for Company B it is EUR 20.00. Assume only these two participants in the market.
Answer the following questions (Q6 to 10):
In the given scenario, what would be the preferable choice for installation A to get fully
covered for their emissions.
a) Reduce the emission at its own reduction cost
b) Purchase the allowance at market price
c) None of the above
Hint: Company A’s reduction costs (or abatement costs) are EUR 10.00 per tonne of CO2
and for Company B's it is EUR 20.00 per tonne of CO2.
Q7: In the given scenario, what will be the effective cost to be incurred by Installation B to
get fully covered for their emissions.
a) EUR 100000 - 120000
b) EUR 120000 - 140000
c) EUR 140000- 160000
d) EUR 160000- 180000
Hint: Company A will find it cheaper to reduce emissions as much as possible. So, it will
reduce 20000 tones (at cost of , 20000*10 = EUR 200000). Then, it can sell the excess 10000
tones to B at the prevailing price of EUR 15, that is, 10000*15 = EUR150000. Thus, from the
perspective of Company B, it is still cheaper at EUR150000, than abating on its own at
EUR200000 (cost of EUR20).
Q8: In the presence of emission trading system, compute the abatement cost (cost of per
tonne reduction) incurred to reduce 20000 tonnes of emission.
a) EUR 140000- 180000
b) EUR 180000- 220000
c) EUR 220000- 240000
d) EUR 240000- 260000
Hint: Company A will find it cheaper to reduce emissions as much as possible. So, it will reduce
20000 tones (at cost of, 20000*10 = EUR 200000). Then, it can sell the excess 10000 tones to
B at the prevailing price of EUR 15, that is, 10000*15 = EUR150000. Thus, from the
perspective of Company B, it is still cheaper at EUR150000, than abating on its own at
EUR200000 (cost of EUR20).
From system perspective, an expenditure of EUR200000 was made to reduce 20000 tone
emissions at abatement cost of EUR10 per ton.
Q9: In the absence of emission trading system, compute the abatement cost (cost of per tonne
reduction) incurred to reduce 20000 tonnes of emission.
a) EUR 200000 - 240000
b) EUR 240000 - 280000
c) EUR 280000- 320000
d) EUR 320000- 360000
Hint: In the absence of the trading system, Company A will reduce its own emissions to the
extent of 10000 tones at a cost 10*10000= EURO 100000, and B will reduce its own emissions
to the extent of 10000 tones at ae cost of 20*10000= EURO 200000. Thus, the overall
abatement cost for the system works out EUR300000, or EUR15 per tone.
Q10: Now another Company C also becomes part of the emission trading system. Company
C is falling short of its emission reduction targets by 5000 tones. The abatement cost for
Company C is Euro 40 per tonne. What is the change in abatement cost (per ton) for company
C for these 5000 tons of emissions pre- and post- joining the ETS?
a) EUR 10-20
b) EUR 20-30
c) EUR 30-40
d) EUR 40-50
Hint: For company C, Pre- ETS the cost of these 5000 tones was Euro 40. Post joining ETS,
these emissions will be mitigated by A at Euro 10 and sold at Euro 15 to C. Thus, C’s abatement
cost has decreased by 40-15=25 Euro per ton.
