New entrants

In the United States the new entrants included Du Pont (with help from CTA), Tubize, ChatiUon, American Enka, The Industrial Fibre Corp. (later The Industrial Rayon Corp.), American Glan2stoff (later North American Rayon), and American Bemberg. By 1941 the production had risen to 1,250,000 tons. 

The existing ground mbber producers have expanded their capacity to meet anticipated demands. Potential new entrants have been forced to decide whether to go ahead with investment plans, or await a final Congressional verdict. State transportation department groups that lead the anti-Section 1038 faction are also deciding whether to proceed with test sections and other preparations for implementing the requirement. 

An important phenomenon reported in several instances is the ability of new entrants to capitalize upon opportunities created by regulatory demands. This may occur, for example, when pro-ducts are banned or when an existing process technology is severely restricted. (For example, mercury has long been the most important biocide for paint uses. The regulations on this use have elicited several new non-mercurial products, sometimes from companies not previously in the industry.) New entrants may thus be competitively advantaged by the opportunity to comply with regulations. 

A number of Member States and large gas companies have in various ways specified conditions, which need to be fulfilled in relation to security of supply or availability of storage for existing and new entrants into the market ... 

We believe that this information can be used to directionally forecast the long term average margins and severity of troughs and peaks in the future, and thus enable incumbents, potential investors, and new entrants to better assess their long term prospects. 

The details of allocation methods matter new entrant, closure, and incumbent allocation rules all affect the incentives, pricing and efficiency of the scheme. 

If the objective of free allocation is to compensate existing assets for the impact of new regulation, it should not be required for new entrants. In practice, most governments set aside free new entrant reserves , which economically amount to an investment subsidy. If the volume were unlimited, such subsidies might reduce the product price - which may be part of the aim, but is not actually achieved." Governments use NERs to help support new construction, but giving free allowances in proportion to the carbon intensity of new plants, can bias the incentive towards more carbon-intensive investments (Neuhoff et al., this issue). When projected forwards, such distortions are amplified by the multi-period nature of the EU ETS, to which we now turn. 

Nevertheless, the devolution of allocation responsibilities does cause significant problems. The most notable area is with respect to new-entrant rules, where free allocation forms a subsidy to new investments. This raises the prospect of a race to the bottom as Member States compete to attract investment - though such subsidies are usually at a macroeconomic cost, in this case exacerbated by the need to then cut back emissions more elsewhere in the economy (or to buy international credits) to comply with Kyoto targets. 

This suggests a sharp contrast between the methods appropriate for incumbents, and those for new entrants. Differentiating allocations to incumbents based on their carbon intensity avoids a large redistribution of rents associated with existing assets politically, it is unavoidable and does not in itself distort the efficiency of the system, provided the practice is phased out over successive periods. Differentiating allocations to new entrants based on their carbon intensity has no such defence, runs counter to the objectives of the system, and builds up trouble for the future by failing to encourage low-carbon investments. 

The amounts available in most allocation plans are limited, and the response of new construction too slow and once operational, carbon-intensive new entrants face the same incentive as incumbents to factor-in opportunity costs of production. 

The modelling studies of Neuhoff et al. (this issue) include an example where technology-specific new entrant reserves, extended into technology-specific incumbent free allocations in future periods, result in coal plants being constructed that would not have been economic in the absence of the EU ETS. 

The remainder of this article is structured as follows. In Section 2 we describe the reference case, which mimics the results of an efficient cap-and-trade programme, and then discuss the distortions that result due to allocation to existing power stations. Section 3 deals with new entrants. Section 4 sets out some conclusions. 

We assess the economic incentives and their impacts resulting from allocation to new projects of power generators. All Member States have made provisions that guarantee a certain volume of free allowances to new entrants for a defined period. Section 3.1 uses a simple analytic model to illustrate the impact of a uniform allocation of C02 allowances to all new projects, Section 3.2... 

Most phase I NAPs provide for NE allocations based on a general emission rate and predicted activity level. For example in The Netherlands (NL), new entrants are allocated allowances based on projected output or fixed cap factor multiplied by uniform emission rate in line with that of a combined-cycle gas turbine (CCGT). In France, Germany and Poland, C02-intensive power generators, such as coal-fired installations, receive the highest number of allowances per kW installed. The literature highlights the risk that NE provisions can create distortions (Harrison and Radov, 2002). In order to illustrate how these rules can impact electricity prices and C02 emissions in our GB simulations, we focus on two approaches one based on a uniform benchmark and one based on a fuel-specific benchmark. In both cases the forecast capacity factor of new entrants is fixed at 60%. 

To illustrate the impact of new entrant allocation, we calculate the long-term investment equilibrium for a competitive electricity market. Section 3.3 will subsequently assess the impact in real electricity markets, where existing generation assets do affect the generation and price structure. 

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