The Choice between Auctioning and Grandfathering in the Eu

Abstract

Based on Hillman's (1982) political support function model, we explain the shift from auctioned to grandfathered emission trading in the European Union (EU). The analysis focuses on the three main interest groups, namely industry, consumers and environmentalists, in the framework of a support function approach where the relative lobby effort is determined by the relative gain the lobby groups experience from the proposed policy. Our general model suggests that even though the three main interest groups clearly support the switch from auctioning to grandfathering, this does not necessarily imply that there will be more support for achieving the Kyoto target level. An additional effect emerges when choosing grandfathering compared to auctioning since grandfathering means that the industry will be less willing to reduce emissions due to rent seeking motives that encourage lobbying for more permits and capturing additional rents. When rent seeking motives are sufficiently strong, they will jeopardize the overall achievement of the Kyoto target level in the EU. However, this effect will be eliminated if EU's recent plan to auction most of the permits from 2013 onwards succeeds.