The European Union's Emissions Trading Scheme (EU ETS) is the most
vital policy of the European Commission's Climate Change Program. Emit-
ters can trade allowances freely in the market. Therefore, decide the al-
lowance price through the free market mechanism is ecient way to reach
the emission reduction target.
In 2006, approaching the rst emission report to release , market nor-
mally expect the shortage of emission allowances, thus the price of allowance
reach e30, but with the emission report release, the problem of shortage
were not as expected, within just a short period the permit price slumps to
e10, in 2007, the price of permit approach to e0. The non-strict National
Allocation Plan (NAP) causes the problem of oversupply and high variation
of EUA price.
Introducing EU ETS imposes additional production cost on these emit-
ters, hence it is very essential for these emitters to monitor the emission
allowance price, especially, in the situation that the price change violently,
as the highest price is e30 in 2006, but in the 2007 the allowance price
almost close to e0. Also, it is helpful for risk manager, broker and trader
in this market. However, In this study, we embed the concept of internal-
ization of the external cost into the general equilibrium model and forecast
the emission allowance price under the optimal allocation rule.
i

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