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emissions trading
& competitiveness
ALLOCATIONS, INCENTIVES AND INDUSTRIAL COMPETITIVENESS
UNDER THE EU EMISSIONS TRADING SCHEME

EDITORS:
Michael Grubb and
Karsten Neuhoff

climate policy
VOLUME 6 ISSUE 1 2006
 Published by Earthscan in 2006

Copyright © Earthscan, 2006

All rights reserved

ISSN: 1469-3062
ISBN-13: 978-1-84407-403-7
ISBN-10: 1-84407-403-X

Typeset by Domex
Printed and bound in the UK by Cromwell Press
Cover design by Paul Cooper Design

Responsibility for statements made in the articles printed herein rests solely with the contributors. The views expressed by
the individual authors are not necessarily those of the Editors or the Publishers.

For a full list of Earthscan publications please contact:

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Earthscan is an imprint of James & James (Science Publishers) Ltd and publishes in association with the International
Institute for Environment and Development.

Climate Policy is the leading international peer-reviewed journal on responses to climate change. For further information see
www.climatepolicy.com.

Prelims.pmd 2 7/19/2006, 1:48 PM

 Contents

Preface
TOM DELAY 5
Allocation and competitiveness in the EU emissions trading scheme: policy overview
MICHAEL GRUBB, KARSTEN NEUHOFF 7
The impact of CO2 emissions trading on firm profits and market prices
ROBIN SMALE, MURRAY HARTLEY, CAMERON HEPBURN, JOHN WARD, MICHAEL GRUBB 31
CO2 cost pass-through and windfall profits in the power sector
JOS SIJM, KARSTEN NEUHOFF, YIHSU CHEN 49
Allocation, incentives and distortions: the impacts of EU ETS emissions allowance
allocations to the electricity sector
KARSTEN NEUHOFF, KIM KEATS MARTINEZ, MISATO SATO 73
CO2 abatement, competitiveness and leakage in the European cement industry under
the EU ETS: grandfathering versus output-based allocation
DAMIEN DEMAILLY, PHILIPPE QUIRION 93
Free allocation of allowances under the EU emissions trading scheme: legal issues
ANGUS JOHNSTON 115
Auctioning of EU ETS phase II allowances: how and why?
CAMERON HEPBURN, MICHAEL GRUBB, KARSTEN NEUHOFF, FELIX MATTHES, MAXIMILIEN TSE 137

Prelims.pmd 3 7/19/2006, 1:48 PM

Prelims.pmd 4 7/19/2006, 1:48 PM
 Free allocation of allowances under the EU emissions trading system: legal issues 5

www.climatepolicy.com

Preface
Tom Delay*
The Carbon Trust, 8th Floor, 3 Clement’s Inn, London WC2A 2AZ, UK

The European emissions trading scheme (EU ETS) is a driving force for business interest in reducing
CO2 emissions. In capping emissions from power generation and much of heavy industry in Europe,
it gives value to their efforts to reduce emissions and has created a market with an asset value
worth tens of billions of euros annually. Putting a price on carbon has been an achievement of
global significance, as a focal point also for those seeking to invest through Kyoto’s international
project mechanisms of CDM and JI.
Like any market, price is central and the key to prices is scarcity. The most fundamental difference
between emissions trading and any normal market is that the amount available depends directly on
government decisions about allocations. Recent events have underlined the need for robust allocation
as the system moves into the Kyoto phase, and investors are already starting to look beyond that to
the post-2012 period. Yet governments also have a duty not to undermine the competitiveness of
their industries, and there are fears that the two aims could conflict.
Recognizing the central importance of competitiveness concerns, in 2004 the Carbon Trust
conducted a pioneering study on the competitiveness impacts of the EU ETS.1 Building upon this
work, in 2005 the Carbon Trust sponsored an international collaborative study with the European
research network Climate Strategies, led by our Chief Economist, Michael Grubb. The work aimed
both to build upon our earlier study, and add to this much deeper analysis of the issues surrounding
allowance allocation, costs and incentives. The full results are presented in this special issue of
Climate Policy.
As a lead investor in this research, the Carbon Trust has taken a strong interest in the work, but
does not itself hold any responsibility for the views expressed in the individual articles. We do
firmly believe that UK and European policy can only be improved by such detailed and relevant
analyses by independent researchers, published for open debate, as represented by the articles
here. The Carbon Trust has taken this work as the evidence base for its own position on the EU
ETS, published as a separate report in late June 2006.
We are pleased to have helped support this work through to completion, and are also grateful to
the co-funders in UK and European industry and governments for matching the Carbon Trust
contribution, and for their substantive input along the way. On behalf of all the sponsors we also
thank all the researchers involved for their intensive efforts, Climate Strategies for managing the

* Corresponding author. Tel.: +20-7170-7000; fax: +20-7170-7020

E-mail address: [email protected]

© 2006 Earthscan Climate Policy 6 (2006) 5–6

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 6 Tom Delay

project and the review process, and Earthscan for producing this special issue in such a timely and
professional manner.

Tom Delay
Chief Executive
The Carbon Trust

Note
1 Published as The European Emissions Trading System: Implications for Industrial Competitiveness, 2004 [available from
http://www.carbontrust.co.uk/Publications].

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 Allocation and competitiveness in the EU emissions trading system: policy overview 7

RESEARCH ARTICLE www.climatepolicy.com

Allocation and competitiveness in the EU emissions trading

scheme: policy overview
Michael Grubb*, Karsten Neuhoff
Faculty of Economics, Cambridge University, Sidgwick Avenue, Cambridge CB3 9DE, UK

Abstract
The European emissions trading scheme (EU ETS) has an efficient and effective market design that risks being
undermined by three interrelated problems: the approach to allocation; the absence of a credible commitment to
post-2012 continuation; and concerns about its impact on the international competitiveness of key sectors. This
special issue of Climate Policy explores these three factors in depth. This policy overview summarizes key
insights from the individual studies in this issue, and draws overall policy conclusions about the next round of
allocations and the design of the system for the longer term.

• Allocations for 2008–2012. Allocations defined relative to projected ‘business-as-usual’ emissions should
involve cutbacks for all sectors, in part to hedge against an unavoidable element of projection inflation.
Additional cutbacks for the power sector could help to address distributional and legal (State aid) concerns.
Benchmarking allocations, e.g. on best practice technologies, could offer important advantages: experience in
different sectors and countries is needed, given their existing diversity. However, a common standard for new
entrant reserves should be agreed across the EU, based on capacity or output, not on technology or fuel.
Maximum use of allowed auctioning (10%) would improve efficiency, provide reassurance, and potentially
help to stabilize the system through minimum-price auctions. These measures will not preclude most participating
sectors from profiting from the EU ETS during phase II. Companies can choose to scale back these potential
profits to protect market share against imports and/or use the revenues to support longer term decarbonization
investments, whilst auction revenues can be used creatively to support broader investments towards a low-
carbon industrial sector in Europe.
• Post-2012 design. Effective operation during phase II requires a concrete commitment to continue the EU ETS
beyond 2012 with future design addressing concerns about distribution, potential perverse incentives, and
industrial competitiveness. Declining free allocation combined with greater auctioning offers the simplest
solution to distributional and incentive problems. For its unilateral implementation to be sustainable under
higher carbon prices over longer periods, EU ETS post-2012 design must accommodate one of three main
approaches for the most energy-intensive internationally traded sectors: international (sectoral) agreements,
border-tax adjustments, or output-based (intensity) allocation. If significant free allocations continue,
governments may also need to follow the example of monetary policy in establishing independent allocation
authorities with some degree of EU coordination.

* Corresponding author. Tel.: +44-1223-335288; fax: +44-1223-335299

E-mail address: [email protected]

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 8 Michael Grubb and Karsten Neuhoff

Such reform for the post-2012 period would require the Directive to be fundamentally renegotiated in relation to
allocation procedures. Such renegotiation is neither feasible nor necessary for phase II operation. Rather, phase II
should be a period in which diverse national approaches build experience, whilst the profits potentially accruing
to participating sectors can be used to protect market share and jump-start their investments for a globally carbon-
constrained future.

Introduction
The EU emissions trading scheme was launched in 2005 to cap CO2 emissions from heavy industry.
Covering almost half of all EU CO2 emissions, it forms the centrepiece of European policy on
climate change. Trade in these emission allowances gives value to reducing CO2 emissions and
has formed a market with an asset value worth tens of billions of euros annually. Putting a price on
carbon has been an achievement of global significance, through the linkages to emission credits
generated under the Kyoto mechanisms: indeed, in response to the unexpectedly high prices of
2005, a flood of such projects started coming forward.
Although unprecedented in its scale and scope, the main pillars of the EU ETS were built on many
years of economic research into theories of emissions trading, combined with practical experience of
emission trading schemes principally in the USA. Yet the analogies are far from exact, and the emerging
experience with the EU ETS is beginning to highlight the profound nature of the differences – many of
which have thus far been under-appreciated in economic and policy analysis.
Like any market, the key to prices is scarcity, and the price depends on both the absolute
quantity of allowances available and expectations about the future. The most fundamental difference
of emissions trading from any normal market is that the amount available depends directly on
government decisions about allocations; and expectations about the future are largely expectations
about future emission targets. The large reduction of EU ETS prices in Spring 2006 is the first
tangible sign of the scale of the problems around allocation in the EU ETS. Equally, some of the
initial responses give a foretaste of numerous other possible problems:

• Suggestions to ‘bank’ surplus allowances forward into phase II (the Kyoto first period), without
understanding and correcting the cause of the initial problem, may simply exacerbate similar
problems in the next, crucial, Kyoto phase;
• Plans to withdraw allowances from the market risk being seen as penalizing abatement. Indeed
such ex-post adjustment runs the risk of undermining the basis of a stable market upon which
industry feels confident to invest;
• Proposals to use 2005 as the base year for phase II allocation risk a perverse ‘updating’ incentive;
a belief that higher emissions today will be rewarded with bigger allocations in future periods.

Due in part to the sheer scale of the EU ETS, governments are subject to intense lobbying relating
to the distributional impact of the scheme, and are constrained by this and by concerns about the
impact of the system on industrial competitiveness. Few academics understand the real difficulties
that policy-makers face when confronted with economically important industries claiming that
government policy risks putting them at a disadvantage relative to competitors. Yet attempts to
manage the consequences – by giving allocations based on projected needs, by ex-post adjustments
after the real situation becomes clearer, or by updating allocations based on most recent data – are
loaded with the potential to weaken the system with perverse incentives that undermine the original

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 Allocation and competitiveness in the EU emissions trading system: policy overview 9

objective. The same is true of many other ‘f ixes’ to meet the pressures of lobbying and
competitiveness concerns. Allocation is at the heart of the EU ETS; it is also potentially its
Achilles heel.
This special issue brings together the most complete analyses of these core issues yet conducted:

• Three articles apply economic modelling to focus directly upon how the EU ETS and allocation
decisions may affect sector profits, pricing, market share and incentives: an overview study of
five key sectors, complemented by finer-grained modelling of the electricity and cement sectors,
to study the incentive aspects of different allocation approaches.
• Three articles look at issues arising from these economic conseuences of the EU ETS. One
study presents initial empirical evidence about the system’s impact on electricity prices and
profits. A legal study highlights how the scale of profits generated under the ETS may itself
bring contrary pressures to bear on the allocation process through State-aid considerations.
Both of these then inform an analysis of the issues surrounding auctioning of emission allowances,
including the extent to which auctioning might help to address some of the difficulties identified
in other articles.

This overview also draws on several other studies, including a related analysis of how the modelling
studies of aggregate sectors ‘in equilibrium’ relate to the diverse nature of key sectors across
Europe, and the likely dynamics of economic impacts and mitigation potentials over time (Grubb
et al., 2006).
This policy overview is in two parts. Part A draws directly on these component studies to clarify
and emphasize five ways in which the EU ETS differs from previous emissions trading systems:

1. The economic scale of the scheme, which drives heavy lobbying around allocation and
competitiveness concerns, yet which paradoxically is the source of profit-making incentives
unprecedented in the history of environmental policy;
2. The consequently small nature of cutbacks relative to ‘business-as-usual’ and the resulting
instabilities in the system;
3. The corresponding large proportion of free allocation, which underlies legal stresses and the
scope for distortions;
4. The multi-period nature of allocations, which drives dependence both upon post-2012 decisions
and the risk of perverse incentives;
5. The devolution of allocation responsibilities to Member States and the way this affects the
development of viable solutions.

Part B then examines the ‘bigger picture’ policy implications that flow from this: the implications
for allocation during phase II; the options for longer-term continuation; and the implications in
terms of the existing Directive and related institutional considerations.

Part A: Why the EU ETS is different – and what that implies

A1. Scale, costs and competitiveness
In terms of economic scale, the European emission trading scheme is the biggest such scheme in
the world by an order of magnitude. At allowances prices in the range d10–30/tCO2, the value of

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 10 Michael Grubb and Karsten Neuhoff

allowances issued every year is d22–66 billion, compared with the USA’s East Coast NOx trading
programmes (d1.1 billion) or SO2 trading schemes (d2.8–8.7 billion).1 The sheer scale of the EU
ETS means that it could affect the costs of key industrial sectors more than any previous
environmental policy – perhaps more than all the others put together. Yet part of the problem in the
debate over the EU ETS is the tendency to make sweeping generalizations, not least about costs
and competitiveness impacts.
Two aspects drive competitiveness issues. First, the level of international competition for a specific
product and, second, the direct and indirect CO2 emissions associated with the production. Figure 1
provides a sense of scale for both dimensions.
As an indicator for the cost exposure, the vertical axis of Figure 1 depicts the potential value at
stake for major industrial sectors. It is defined as the potential impact of the EU ETS on input costs
relative to sector value-added, before any mitigation or pass-through of costs onto product prices.
The horizontal axis shows the current trade exposure of these sectors. The data are for the UK,
which in many respects is one of the most exposed countries in Europe to external trade effects,
and in which most sectors (with the exception of pulp and paper) are plausibly representative of
the situation facing many European producers.
The lower end of the vertical bars shows the net value at stake (NVAS) if the sector participates in
the EU ETS and receives free allocations equal to its ‘business-as-usual’ emissions, takes no abatement

Source: Grubb et al. (2006).

Figure 1. Value at stake over range 0–100% free allocation. The chart shows value at stake
(see text) relative to total value-added by sector, plotted against UK trade intensity. The
bars span the range from (NVAS) 100% free allocation, to (MVAS) the theoretical impact
of zero free allocation or equivalent carbon tax. Results are for a carbon price of 15d/tCO2
and an electricity cost pass-through that increases power prices by d10/MWh, consistent
with a coal-dominated power system (CCGTs could roughly halve this rate of electricity
price impact for the same carbon price). Scaling the electricity price moves the lower point
of the bars in proportion; scaling the carbon price scales the length in proportion.

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 Allocation and competitiveness in the EU emissions trading system: policy overview 11

action, and does not change product prices: the NVAS then represents the sector’s exposure to indirect
costs through electricity price impacts only, since all direct emission costs are covered by free
allocations. The most striking feature of the graph is that only three sectors have NVAS
exceeding 1.5% of sector value-added. If exposed to the full impact of electricity price rises, NVAS
is estimated at 2.1% for Cement, 2.7% for Iron and Steel, and finally 4.4% for Non-ferrous Metals
(principally aluminium).
The high value attributed to non-ferrous metals reflects dependence on electrical input for
processes, particularly for aluminium, which sometimes result in it being termed ‘solid electricity’.2
For cement, iron and steel, the figure is around 2%; refining, which uses hardly any electricity
from the grid and has NVAS with 100% free allocation, is 1.3% of its total value-added. The pulp
and paper sector does not have significant cost exposure in the UK, although other EU producers
may have. The impacts could be non-trivial for a few other individual subsectors – notably in glass
and ceramics, and in chemicals, both of which have average sector NVAS exposure (at 100% free-
allocation), close to 1% of value-added. In all cases, the actual net impact depends on the extent
that industries can undertake cost-effective emissions abatement measures or pass on CO2-related
costs to product prices.

Box 1: Five principles underlying the economic impacts of emissions trading

The aim of emissions cap-and-trade is to secure emission reductions at the lowest possible
overall cost: the trading allows companies to seek emission reductions to meet the aggregate
cap wherever and however it is cheapest to do so. Five principles underlie the practical
economic impact of an emissions trading system applied to CO2:

1. In general, CO2 constraints generate economic rents, and free allocation of allowances to
industry gives the potential to capture this value and profit, subject to:
(a) degree of alignment of allowances with costs (e.g. not sectors outside EU ETS or
affected primarily by electricity pass-through costs);
(b) constraints on cost pass-through due to imports and other factors.
2. Profit and market share are not synonymous, and for internationally traded goods they
are frequently in opposition: the more that companies profit by raising prices to reflect
the opportunity costs of carbon, the greater the possible erosion of their market share
over time.
3. The details of allocation methods matter: new entrant, closure, and incumbent allocation
rules all affect the incentives, pricing and efficiency of the scheme.
4. The power sector can and does pass through the bulk of marginal/opportunity CO 2-
related costs to the wholesale power markets, as expected in a competitive system,
resulting in substantial prof its and downstream costs where retail markets are
competitive.
5. Other participating sectors also have the potential to profit in similar ways, but the net
impact is complicated by details of electricity retail market regulation, by international
trade, and by downstream company, regional and product differentiation.

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 12 Michael Grubb and Karsten Neuhoff

The upper end of the bars shows the theoretical impact on sectors in the EU ETS if there were no
free allocations – equivalent to 100% purchase (on markets or through auctioning at the market
price). This forms a potential maximum value at stake (MVAS) that would arise from such allocation,
or an equivalent carbon tax, if product prices were held constant and no abatement undertaken.
The significance of the upper level (no free allocation) is that it also gives an indication of the
impact on marginal/opportunity cost for producing an additional unit of output. 3 As long as
increasing or decreasing production does not change the amount of free allowance allocation, the
incremental decision to produce more (or less) faces the full cost of extra allowances (or the
opportunity cost of not selling allowances). Thus the upper end of the bars gives a rough indication
of the potential relative impact on output prices, if firms pass through these opportunity costs. As
discussed below, such pricing can lead to large profit gains from the EU ETS.
However, passing through the opportunity cost impacts of the EU ETS would increase prices
relative to imports from regions outside the EU ETS.4 This forms the main constraint on the ability
to pass CO 2-related costs on to customers. The chart also shows (horizontal axis) the existing
degree of imports from outside the EU. The quite exceptional position of aluminium, as noted in
Smale et al. (this issue), is readily apparent – not only is its NVAS potentially twice that of any
other sector, but the same is true of its import intensity.
In contrast, hardly any cement is currently imported from outside the EU. This does not imply
that changes in production costs cannot create opportunities for international trade. Its maximum
value at stake (MVAS) – and the relative significance associated with marginal/opportunity cost
pricing – is comparable with electricity itself, at more than twice that of any other sector. This
explains the high leakage rate associated with profit-maximization mentioned in Demailly and
Quirion (this issue): if the sector passes through most of its marginal/ opportunity costs, the price
differential simply becomes so large as to overcome the barriers that have traditionally kept foreign
imports out.
The equivalent MVAS impact on refining and fuels, and iron and steel, is about 6% each and
both have existing trade intensity around 7–8%. For the UK, no other sector in aggregate has
marginal value-at-stake impacts above 2%, even for zero free allocation.
Several points flow from this. Allocation and competitiveness in the EU ETS is a tale about a
few key sectors. At the prices and allocations plausible in phase II (considered briefly below) the
net cost impacts are not large relative to sector value-added. If impacts on marginal costs were
passed through to prices, while the sectors still receive mostly free allocations, as detailed below
the sectors will profit substantially but with an erosion of international competitiveness over time.
Moreover, differences in allocations between Member States would affect the cash flows of their
companies (the length of the vertical bars gives an indication of sensitivity to this), and many have
far greater trade within Europe than outside it (discussed further in Grubb et al., 2006, which
presents equivalent data for trade within the EU). In reality these internal dimensions do far more
to drive lobbying and allocation decisions than the external competitiveness considerations, and
we now turn to consider some consequences.

A2. Small cutbacks and price instabilities

The scale of the EU ETS, combined with the relative difficulty of reducing CO2 emissions compared to
many other pollutants, has two immediate consequences: cutbacks imposed in phase I – and under
discussion for phase II – have been small; and prices have been volatile. Cutbacks in phase I of EU ETS

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 Allocation and competitiveness in the EU emissions trading system: policy overview 13

amounted to about 1% of projected needs, contrasting, for example, with the US SO2 programme,
which involved cutbacks over 50% of historical emissions, and additional reductions later.
The evolution of prices is illustrated in Figure 2. In the few months after its launch, prices,
initially around d10/tCO2, rose to unexpectedly high levels. This was due to two main factors:
European Commission resistance to larger allocations in some outstanding disputes with Member
States; and soaring gas prices that drove electricity production back to coal and raised the CO2 price
that would be required to reverse this. After tracking the coal–gas price differential up to close to
d30/tCO2, prices decoupled from gas prices and varied in the range d20–30/tCO2, as emitters
focused on other opportunities, before crashing in Spring 2006.
The price crash occurred as data on actual 2005 verified emissions were released, and this
displays the extreme sensitivity arising from the small cutbacks of EU ETS allocations. Figure 3
shows the actual emissions,5 compared to the corresponding initial allocations, and a few different
estimates made by market analysts. Even as late as Spring 2006, there were retrospective estimates
from a leading provider of market intelligence that turned out to be completely wrong. The
uncertainty in projections upon which NAPs had originally been based was, of course, far wider.
Some excess of allocations over verified emissions, which led to the large price reductions, was
predictable. 6 Moreover, as indicated, the higher gas prices shifted some power generation back
from gas to coal-based operation, increasing emissions compared to initial power sector projections.
Thus the error, and the excess of allocations, could easily have been bigger, and this was the case
in most other sectors. Both evidence and theory suggest that projection-based targets and allocations
tend to be biased upwards.7
The key difference between the EU ETS and other trading programmes is that the cutbacks
negotiated have been well within the range of projection uncertainty. This inevitably creates price
volatility if, as has been the case before, emissions turn out to be lower than the projected basis
upon which allocations are made.

Source: European Energy Exchange.

Figure 2. EU ETS trading prices from Dec 2004 to May 2006.

© 2006 Earthscan Climate Policy 6 (2006) 7–30

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 14 Michael Grubb and Karsten Neuhoff

Figure 3. Uncertainty of emission projections from installations covered by the

EU ETS. The chart shows best estimates of total CO2 emissions from EU ETS
sectors in 2003 and 2005 (connected by dotted line), compared to allocations
(flat line 2005–2007), and two estimates of 2005 emissions provided by market
analysts in the months leading up to the release of the verified emission data.
The shaded area indicates a plausible range of uncertainty in emission
projections for the phase I period at the time of initial allocation decisions.

Price volatility carries a cost. Difficulties in predicting future allowance prices are delaying
investment decisions. By waiting, a company can gain more knowledge about future CO2 prices,
and thereby make better decisions. Furthermore, in the presence of price uncertainty, risk aversion
is also likely to reduce investment.8 The risk of low CO2 prices represents a significant hurdle for
low-carbon investments. Obviously, companies are prepared to bear risks, but they generally prefer
to take risks in their core business, where the additional management attention can at the same
time create strategic opportunities.
As indicated in the Introduction, most of the immediate responses to the price crash threaten to
exacerbate underlying problems, because of the way they undermine the integrity of the market or
introduce perverse incentives. Clearly, given relatively modest cutbacks in the face of large
uncertainties, policies which can provide a greater degree of price stability in the EU ETS would
be valuable. 9 Options considered in this special issue (by Hepburn et al.,) include the use of
‘active auctioning’.

A3. Potential over-compensation and profit-making

A third and related feature is the tendency towards ‘overcompensation’. CO2 costs feed into production
costs. The normal response to higher input costs is to raise product prices to compensate. Economically,
free allocation amounts to an alternative way of compensating – or protecting – companies from the
costs of carbon.
Firms in reasonably competitive markets maximize profits by setting prices relative to marginal
cost of production. These marginal costs now include opportunity costs of CO2 allowances, even
if allowances are received for free – in which case there is potential ‘double compensation’. This

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 Allocation and competitiveness in the EU emissions trading system: policy overview 15

creates the potential to make substantial profits, as found in the modelling studies in this issue by
Smale et al., and analysed more fully for electricity by Sijm et al. and for cement by Demailly and
Quirion.
The empirical situation is mixed (Sijm et al., this issue). In countries with liberalized power
markets, generators have passed through most of the opportunity costs, as expected, with aggregate
profits totalling billions of euros. There are notable exceptions, including France and Spain, where
the retail price levels are set by government contracts or regulation.10 However, whilst consumers
may welcome such protection from the real costs of CO2, all these approaches create distortions
that can prevent entry from third parties and undermine the intended incentives for companies to
reduce CO2 emissions and for consumers to reduce electricity consumption.
In other sectors, pricing responses may be influenced by competition from outside Europe. This
is not an ‘all or nothing’ constraint: if firms maximize profits, they will still generally pass through
much of the opportunity cost, making profits at the risk of some loss of market share (Smale et al.,
this issue). Granting free allocations is thus highly imperfect as a protection against foreign
competition: companies still face the full costs in their marginal production decisions. In most
products, the price rise required to recoup the net exposure (NVAS) alone is trivial (Carbon Trust,
2004; Grubb et al., 2006); the marginal cost incentive is to go beyond this, and firms will end up
both making profits from the system and losing some market share.
The more robust justification for free allocation is that it compensates existing assets for the
impact of environmental regulation that was not foreseen at the time of construction. This interpretation
would create clear criteria for the amount and basis for allocation, and indicate that free allocation
is part of a transitional process towards a strategic objective of fully internalizing CO2 costs.
Free allocation of allowances probably qualifies as State aid under the State Aids Directive (Johnston,
this issue). Countries may thus have to make State aid declarations (otherwise, allocations could be
challenged in national courts). State aid could be justified as a compensation for forgone profits due
to the environmental regulation, but in this situation the proportionality principle applies – the amount
of State aid should be proportional to the forgone profit. To the extent that profits may be deemed to
amount to excessive compensation, this may create considerable legal pressures to reduce the scale
of free allocations.
Free allocation can distort incentives. If installations cease to receive free allowances when they
close, the withdrawal of over-compensation creates a perverse incentive to keep inefficient facilities
operational.
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. 11 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.

A4. The multi-period nature of the EU ETS

The repeated negotiations of allocations for subsequent periods create additional challenges for
the European emission trading scheme. CO2 budgets and allowance allocations are only determined

© 2006 Earthscan Climate Policy 6 (2006) 7–30

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 16 Michael Grubb and Karsten Neuhoff

for a limited time period, initially 3 and 5 years. Even beyond 2012, the need for flexibility to
adapt to learning in both climate change science and mitigation may make it difficult to commit
credibly to much longer allocation periods. The complications of international negotiations put
further constraints on such commitments.
As indicated above (and see note 9), uncertainty about the future carries a cost, and early clarity
about post-2012 continuation would be valuable. The rules surrounding future allocations, however,
need to address a number of issues arising from the potential incentives surrounding multi-period
allocations.
In negotiating allocation plans for future periods, governments will inevitably f ind it hard
to ignore the latest information on emissions. For example, upon releasing the verif ied
emissions data for 2005, the European Commission suggested that these should be considered
in allocation plans for the period 2008–2012. Yet, such ‘updating’ creates a potential problem,
sometimes known as the ‘early action problem’: if free allocations continue and industries
expect future allocations to reflect recent emissions, this undermines the incentive to reduce
emissions now.
This is the strongest case of the ‘updating’ problem. In fact, there are a range of periodic allocation
options which introduce different degrees of perverse incentives, as illustrated in a ‘pyramid of
potential distortions’ (Table 1, also see Neuhoff et al., this issue). This illustrates how the distortions

Table 1. Effect of allocation methods to power sector incumbents

Impacts More expenditure on Increase plant Less energy
extending plant life operation efficiency
relative to new build investments
Distortions Discourage Distortion Shields Distortion Reduce
plant biased output biased incentives
closure towards (and towards for energy
higher consumpt- higher efficiency
emitting ion) from emitting investments
Allowance plant average plant
allocation carbon
method cost
Auction
Benchmarking capacity
only X
capacity by
fuel/plant
type* X X
Updating output only Y X
from previous output by
periods’ fuel/plant
type* X X X X
emissions X X X X X
Note: X indicates a direct distortion arising from the allocation rule. Y indicates indirect distortions
if allocation is not purely proportional to output/emissions.
* Differentiating by plant type adds additional distortions compared to purely fuel-based
distinctions.

Climate Policy 6 (2006) 7–30 © 2006 Earthscan

CP_61_05_Overview.pmd 16 7/19/2006, 1:45 PM

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*** START OF THE PROJECT GUTENBERG EBOOK CHARLIE ***

Note sur la transcription: Les erreurs clairement
introduites par le typographe ont été corrigées.
L'orthographe d'origine a été conservée et n'a pas été
harmonisée. Les numéros des pages blanches n'ont pas
été repris.

CHARLIE
 DU MÊME AUTEUR

LA CENDRE, 7e édition 1 vol.

Tous droits de reproduction et de traduction réservés pour tous les pays,

y compris la Suède et la Norvège.

S'adresser, pour traiter, à M. Paul Ollendorff, éditeur,

rue de Richelieu, 28 bis, Paris.
 FERNAND VANDÉREM

Charlie
ROMAN

PARIS
PAUL OLLENDORFF, ÉDITEUR
28 bis, RUE DE RICHELIEU, 28 bis

1895
Tous droits réservés.
 IL A ÉTÉ TIRÉ A PART
DIX EXEMPLAIRES SUR PAPIER DE HOLLANDE
NUMÉROTÉS A LA PRESSE
(1 à 10)
 A MON AMI
ALFRED CAPUS

F. V.
 CHARLIE
PREMIÈRE PARTIE

I
Au sortir de chez la fleuriste où elle avait prétexté d'aller faire une
commande, Mme Lahonce se courba vers son fils, un petit garçon
d'une dizaine d'années, drôlement vêtu d'un authentique costume de
marin, à pantalon tromblon, à grand col de toile bleu ciel, et, la voix
câline, elle murmura:
—Veux-tu que nous marchions un peu avant de rentrer, mon chéri?
Dis, Charlie, veux-tu?
L'enfant, qui s'absorbait à mordiller le bout de ses gants blancs,
répondit d'un ton machinal:
—Oui, maman!

Alors Mme Lahonce le saisit par la main, et tournant, à droite, l'angle

de l'avenue d'Antin, elle s'achemina, d'un pas pressé, le long de
l'avenue des Champs-Elysées, presque déserte, par ce dimanche
grisâtre et pluvieux d'octobre, à cette heure tardive de midi proche.
Elle marchait vite, vite, la tête baissée, afin d'éviter, sans doute, les
rudesses de la bourrasque qui lui écrasait contre le front ses légers
frisons blond pâle, lui collait au corps sa jupe de drap bleu sombre;
et Charlie, pour la suivre, était obligé de trotter, de s'appuyer à sa
main qui le faisait sauter, rebondir comme une balle, comme enlevé
puis lâché par un souple élastique.

Il s'amusait même beaucoup, s'excitait à ce jeu, souriant à Mme

Lahonce, souriant aux passants, pour les prendre ingénument à
témoin de son agilité, de sa grâce aisée; si bien que tous, au
passage, fixaient la jeune femme et l'enfant, se retournaient pour les
contempler encore.
Seulement ce regard variait selon les personnes. Chez les bourgeois,
chez les braves gens dénués de malice, c'était une admiration
instinctive, attendrie, pour le joli groupe que formaient Mme Lahonce
et son fils, avec leurs visages fins à cheveux blond pâle, leurs
discrets et pareils costumes sombres que rehaussait le clair des
gants blancs.
Et chez les autres au contraire, chez les mondaines informées ou les
experts clubmen qui descendaient l'avenue, le parapluie sous le
bras, la figure importante et soigneusement rasée, l'expression était
toute différente. Il y avait dans leurs yeux méchants un reflet
immédiat d'évaluation, un air d'impertinence connaisseuse, un air
gouailleur de n'être pas dupe, de bien savoir, à peu près, ce qu'elle
valait, ce qu'elle représentait de vertu, où elle courait peut-être si
prestement, cette touchante jeune mère parfumée et son gentil
matelot de sauvegarde.
Mais de toutes ces sympathies, de toutes ces curiosités envieuses,
Mme Lahonce ne semblait rien voir. Elle continuait hâtivement son
chemin, le front toujours baissé, toujours tendu, comme un front de
bête, vers un but invisible et charmeur.
Les femmes, elle ne les examinait ni de près ni de loin. Les hommes,
à distance, elle les inspectait d'un coup d'œil froid et net. Puis,
assurée qu'ils n'étaient pas celui qu'elle guettait, celui qui devait
venir de là-haut, de l'extrémité embrumée de la large avenue, elle
rebaissait le regard, laissait dédaigneusement ces messieurs passer
à côté d'elle, comme des ombres indistinctes et médiocres, sans
sexe, sans visage, sans intérêt. Et pour s'étourdir, se distraire de
l'étouffante angoisse d'attente qui lui gonflait le cœur, elle comptait
ses pas, additionnait les numéros des maisons, posait à Charlie cent
questions désordonnées sur ses camarades du lycée, sur son travail
du lendemain, quand, tout à coup, ses traits se détendirent en un
rayonnement de satisfaction et elle s'écria:
—Regarde, Charlie!... Regarde donc qui arrive là!
Elle désignait de la tête un jeune homme à moustache brun roux, à
tournure élégante de clubman ou d'officier, qui s'avançait, tout
souriant à leur rencontre.
—Favierres! s'exclama Charlie.
—Oui, ton ami Fav! Je te permets d'aller au-devant de lui... Va, mon
chéri!...
Charlie s'élança en courant et stoppa droit devant le jeune homme,
le béret à la main, les joues offertes pour un baiser, dans une
posture correcte de petit garçon bien élevé. Favierres l'embrassait,
lui tapotait affectueusement la nuque:
—Comment ça va, mon vieux Charlie?... Comment ça va?

Il se redressa pour saluer Mme Lahonce, et retenant longuement la

main qu'elle lui tendait:
—Bonjour, Madame!... Dehors si tard? Vous rentrez chez vous, je
suppose?

Mme Lahonce retira sa main et d'une voix un peu altérée d'émotion:

—Mais oui, nous rentrons... Nous rentrons par le plus long... Et Mme
Favierres se porte bien?
Favierres riposta:
—Très bien... Très bien, je vous remercie...
Ils restaient, face à face, les yeux dans les yeux, tout heureux de se
retrouver, tout au soulagement d'être sûrs enfin qu'ils se verraient ce
matin-là.
Puis Favierres reprit d'un ton de prière et de commandement aussi:
—Vous rentrez par l'avenue Hoche, n'est-ce pas, Madame?... Voulez-
vous me permettre de vous accompagner?
—Mais bien volontiers!
Et ces préliminaires accomplis, selon le cérémonial usité par eux au
dehors, dans leurs rencontres matinales, ils se remirent lentement
en route, marchant côte à côte, la tête de profil, souriante, avec cet
air joyeux, ces regards avides l'un de l'autre qui distinguent des
époux repus les couples d'amoureux furtifs.
Charlie pourtant, par sa présence, pouvait donner le change, ajouter
comme un aspect conjugal à cette promenade clandestine. Il
s'accrochait à Mme Lahonce, ne la lâchait pas, la devançant même,
se jetant contre elle, par instants, comme un gros chien turbulent,
pour happer la conversation, entendre ce que racontait son grand
ami Vincent Favierres.
Mais ils parlaient à mi-voix de choses mystérieuses, inintelligibles,
d'un certain «on», entre autres, dont les paroles, les volontés, les
actions semblaient celles d'une personnalité toute-puissante, que
Charlie, lui, ne connaissait nullement. Ils se disaient avec volubilité,
et dans ce langage symbolique et obscur que se créent, à la longue,
les amants, tout ce qui s'était passé chez eux ou ailleurs durant ce
siècle de vingt heures écoulé depuis leur rendez-vous de la veille, les
petites remarques amusantes ou bizarres qu'ils avaient chacun
faites, tout ce qui leur avait paru, dans l'intervalle, propre à gêner ou
à servir leurs amours difficiles.
Alors Charlie, ne réussissant pas à comprendre, prit le parti d'aller
seul, de gambader, de courir en éclaireur, à quelques pas devant sa
mère et son grand ami Fav dont, à la fin, l'indifférence le lassait.
—C'est étonnant comme cet enfant vous aime! disait rêveusement
Mme Lahonce en le voyant s'éloigner. Tout le temps il est à me
demander si vous viendrez, quand vous viendrez, tout le temps à me
parler de vous... C'est extraordinaire! Véritablement, il y a des
moments où je songe que si vous étiez son père il ne vous aimerait
pas davantage!
—Oh! pour ça, répondit Favierres avec un mélancolique sourire, pour
ça, il peut être tranquille, le pauvre petit... C'est un Lahonce, un
vrai... Il est paraphé, signé...
Et il se glissait un doigt sur les lèvres, y dessinait les fines sinuosités
de la bouche de Charlie, la mince bouche des Lahonce, rendue si
célèbre, si populaire jadis, par le grand-oncle de l'enfant, Germain
Lahonce, l'ancien ministre et conseiller de l'Empereur.

Mme Lahonce continua:

—Et puis, lorsqu'il me parle de vous, il faut voir avec quelles
précautions, quelles minuties de discrétion!... Toujours à l'oreille,
toujours en me chuchotant, comme par peur que quelqu'un ne soit
là à l'écouter... Et si votre nom vient à être prononcé, si on cause de
votre musique, de votre talent, il ne bronche pas cet amour, il a
seulement vers moi un petit regard du coin de l'œil, un regard timide
et tellement risible pour me rassurer, pour me faire signe qu'il sait
qu'il ne doit rien dire... Tenez! quelquefois il me semble que j'ai en
lui une sorte de petit complice qui ne nous trahira jamais, qui veut
notre bonheur sans le vouloir... Vous ne trouvez pas ça curieux?
Favierres hésitait:
—Evidemment c'est curieux!... Mais cela s'explique au fond... Cet
enfant m'aime parce que vous m'aimez... Il m'aime parce qu'il n'est
pas encore tout à fait détaché de vous, qu'il tient encore presque à
votre chair... qu'il est encore une partie de vous-même... Plus tard il
changera peut-être, malheureusement... oh! oui, plus tard, plus
tard...
Ils arrivaient près de la grille du parc Monceau. Et, sans achever sa
pensée, Favierres revint brusquement à des considérations plus
prochaines, plus pratiques.
—Voyons, ma chérie, demain, à quelle heure vous verrai-je?...

—Deux heures et demie? proposa Mme Lahonce.

—Bien, deux heures et demie... Ce soir je dîne tout à côté de vous
chez les Jehandy, vous savez pour les chœurs... Que diriez-vous si,
vers dix heures, je venais prendre le thé?... Cela vous ferait-il plaisir?
Est-ce bien prudent, hé?

—Mon Dieu oui! Pourquoi pas? répliqua Mme Lahonce. Nous restons
à la maison, car mes parents viennent... Je n'aurai qu'à annoncer
votre visite, et on sera très content de vous avoir pour finir la
soirée... C'est entendu?
Favierres s'était arrêté et, de nouveau, la pénétrait de son regard
tenace et tendre, comme au premier instant de la rencontre, là-bas,
tout à l'heure, dans les Champs-Elysées.
—Entendu! Cela me diminuera la longueur de la journée, l'idée de
vous voir ce soir... Est-ce triste tout de même que nous soyons
contraints de nous quitter ainsi, de retourner, vous à votre mari, moi
à ma femme!... Est-ce décourageant, est-ce révoltant, ma chérie!

Mme Lahonce poussa un soupir, le visage soudain assombri, tout

sévère de douleur:
—Oh! je vous en prie, mon ami, ne me dites pas cela!... Que voulez-
vous?... Vous savez bien à quel point cela me torture... Vous savez
bien que je ne puis être à vous plus que je ne suis...
Et comme Charlie se rapprochait en sautillant, elle se domina, se
raidit à faire monter à ses lèvres un sourire enjoué et mondain:
—Au revoir monsieur... A ce soir, n'est-ce pas?...
—A ce soir, Madame! Certainement!...

Il serrait ardemment la main de Mme Lahonce, ne pouvait se

résoudre à l'abandonner. Alors la jeune femme, aussi faible que lui,
n'ayant pas le courage de s'arracher d'elle-même à cette étreinte,
murmura doucement:
—Charlie, dis au revoir à ton ami!...
Favierres avait deviné la supplication que cachait cet ordre courtois.

Il laissa aller la main de Mme Lahonce, embrassa Charlie qui,

derechef, le béret retiré, lui tendait ses joues à baiser. Puis, après un
dernier salut cordial, il tourna à gauche, dans la rue de Courcelles,
pendant que Mme Lahonce tournait à droite.
Elle précipitait l'allure maintenant, un peu inquiète de s'être
attardée, d'avoir des explications à fournir.
Mais, tout en se hâtant, elle rassemblait ses arguments, organisait
un plan de récit embrouillé, pour le cas peu probable où son mari lui
demanderait des détails sur cette promenade prolongée; et quand
elle parvint près de chez elle, rue de Lisbonne, elle était armée,
prête à la défense, munie de tous les mensonges nécessaires.
Dans l'escalier seulement, elle avertit Charlie qu'elle ne dirait pas à
M. Lahonce que Favierres l'avait accompagnée si loin, si longtemps:
—Cela pourrait contrarier ton père, chéri... C'est inutile... Je lui dirai
simplement que nous avons rencontré Fav. Tu m'entends, mon
chéri?
Charlie répondit à voix basse, d'un air grave, d'un air comiquement
soucieux:
—Bien, maman!
 II

Dans la salle à manger, un peu sombre et parfumée d'un parfum

d'encens, Pierre Lahonce avait commencé à déjeuner seul.
Corpulent déjà pour ses trente-cinq ans, massif et sanguin, les
cheveux séparés sur le côté à l'anglaise, les mâchoires fortes, la
bouche sinueuse, toute mince, en coup de rasoir, la moustache
roussâtre et courte, s'arrêtant net au coin des lèvres, laissant à
découvert les joues gonflées, étalées, vernissées de rouge aux
pommettes, il avait, avec sa figure de bouledogue de bonne maison,
cette élégance sans grâce, mais non sans charme, des jeunes gens
riches, adonnés au sport, aux soins du corps et des vêtements, une
élégance toute contemporaine faite de propreté, de santé et
d'heureux choix chez les fournisseurs en vogue.
Il mangeait à bouchées rapides, l'air rageur; mécontent, s'arrêtant
par moments pour consulter sa montre ou pour étudier un journal
de sport, dressé en face de lui, contre une carafe; et dès qu'il vit
entrer Mme Lahonce et son fils, il s'excusa sans relever la tête, il
s'excusa précipitamment, d'un ton de courtoisie simulée.
—Tu me pardonnes, Hélène?... J'ai dû me mettre à table... Je
regrette beaucoup... Il faut que je sois à une heure et demie à
Longchamps pour surveiller la jument... Tu me pardonnes, n'est-ce
pas? Impossible de t'attendre... Je n'avais que le temps!...

Mme Lahonce répliqua:

—Tu as eu parfaitement raison!... Nous étions dans notre tort... Nous
nous sommes attardés par mégarde... Il faisait si bon à marcher ce
matin!...
—Je comprends!... Je comprends!...
Lahonce, la mine bougonne, les lèvres presque disparues en un
pincement de colère, s'était remis à lire, comparant les poids,
supputant les chances de son quart de Prisca, de la jument dont
avec Veyragues, le titulaire de l'écurie, Jehandy et Montclar, les deux
autres associés, il était l'anonyme propriétaire.
Mais il lisait mal, sans suite, tout agacé encore du retard d'Hélène et
surtout de l'incorrection qu'elle l'avait forcé de commettre.
Car la correction, le respect des convenances, la ponctualité dans les
rapports, c'étaient à ses yeux de réelles vertus de famille, depuis
l'exactitude proverbiale de Germain Lahonce, le ministre défunt.
C'était comme le patrimoine moral, la marque aristocratique de tous
les Lahonce; et Pierre n'admettait pas qu'on y faillît ou qu'on l'y fît
manquer.
Il accueillit donc froidement, en homme mal disposé, la nouvelle de
la visite de Favierres.
—Oui, je l'ai rencontré tout à l'heure, racontait Hélène d'une voix qui
se dépêchait, bousculait ces phrases dangereuses, tranchantes pour
elle, comme des coutelas... Il m'a dit qu'il dînait chez les Jehandy, à
cause de ces chœurs que Mme de Jehandy veut faire chanter chez
elle. Alors, je lui ai demandé s'il voulait, en sortant, venir prendre
une tasse de thé à la maison... Et il a accepté...
Charlie eut un semblant de toux involontaire, Pierre demeurait sans
répondre; puis, tournant sa cuillère dans son café, le regard baissé,
il riposta ironiquement:
—Et sa femme?... Est-ce qu'elle viendra aussi sa femme?... En voilà
une qui en a une touche! Je l'ai aperçue hier devant le Printemps...
Ah! on n'a pas idée de se fagoter comme cela!...

Mme Lahonce répliqua avec calme:

—Non, il dîne seul... Sa femme ne viendra pas...
—Bien, bien, fit Lahonce négligemment.
Et il se mit à boire son café brûlant, par petites gorgées.
Il n'était pas, au fond, hostile à Favierres. Quoique d'un caractère
emporté, orgueilleux, il n'avait pour le musicien qu'un peu de
dédain,—ce dédain spontané que ressentent les gens du monde
pour ceux qui n'en sont pas,—ce dédain mêlé de prudence que leur
inspirent les artistes, c'est-à-dire des individus dont l'origine est
fumeuse, incertaine, et de la part desquels une faute d'éducation,
une tentative d'emprunt, une indélicatesse quelconque n'étonnerait
pas outre mesure.
Lahonce, d'ailleurs, était plutôt flatté de la préférence que
témoignait pour sa maison ce Favierres recherché, invité, demandé
dans tant d'autres salons.
Et quant à s'alarmer de l'intimité presque amicale qui s'était établie
entre sa femme et le jeune compositeur, quant à prendre ombrage
des fréquentes visites de Favierres, de son assiduité à venir
déjeuner, dîner, chaque semaine, quant à se montrer jaloux,
Lahonce n'avait jamais été troublé de la plus fugitive velléité de ce
genre.
L'idée même qu'Hélène pût être, pût devenir la cocotte, comme il
disait grossièrement, la maîtresse de ce qui que ce fût, ne l'avait pas
une fois inquiété depuis le jour où il l'avait demandée en mariage,
jugée digne de porter le nom illustre de Lahonce.
Pourtant cette confiance qu'il lui accordait n'était pas, en somme, la
puissante sécurité lentement acquise dans l'accumulation des
preuves de tendresse, dans l'irréprochable continuité de l'affection
prodiguée. Il ne la devait ni au temps ni à Mme Lahonce. Il l'avait de
tempérament, de nature, comme on naît avec de la beauté, de la
vigueur, de l'imagination. C'était bien moins de la confiance qu'une
absence totale de méfiance, une native incapacité de soupçonner,
d'aimer avec violence et anxiété. Sur sa femme, il ne pensait rien de
précis, sinon qu'elle lui faisait honneur par sa beauté et qu'il
disposait d'elle en libre et complet usage. Dans la vie comme dans la
littérature, parmi ses relations comme dans les romans ou au
théâtre, la passion l'avait toujours ennuyé. Il n'attribuait aux liaisons
mondaines d'autre cause que le désir réciproque de libertinage,
d'autre but que de contenter ce désir. Toutes les affaires de ce
sentiment l'agaçaient, l'humiliaient par ce qu'elles représentaient
pour lui d'étrange, d'inconnu, d'inhumain; et il se refusait
sommairement à croire ce qu'il n'avait jamais éprouvé.

—Dis donc! s'écria tout à coup Mme Lahonce qui devinait la mauvaise
humeur de son mari et voulait le radoucir par des mots de
sympathie... Dis donc, Pierre... As-tu eu ce matin les nouvelles que
tu attendais de la jument?... Whatson est-il venu?...
Lahonce répondit en se levant:
—Oui, il a fini par venir à onze heures et demie. Mais il ne m'a rien
dit d'intéressant, l'animal!... Avec un bonhomme comme celui-là, pas
moyen d'être fixé... C'est fermé, boutonné comme une tunique!
Il avait tiré sa montre:
—Bigre!... Une heure un quart... Je vais être en retard... Je suis
stupide... Au revoir... Au revoir... Je file!...
Il embrassa vivement Charlie, effleura d'un baiser les frisons blond
pâle d'Hélène, et sur le seuil de la porte:
—Et toi, à propos, Hélène, qu'est-ce que tu fais aujourd'hui?
demanda-t-il en se retournant.

Mme Lahonce répliqua:

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