European Emissions Trading in Practice

European Emissions Trading in Practice

An Economic Analysis

New Horizons in Environmental and Energy Law series

Stefano Clò

This unique and up-to-date book analyses the functioning of the European Emissions Trading Scheme (ETS) and assesses the extent to which relevant legislation has affected its capacity to promote cost-effective reduction of European carbon emissions.

Chapter 3: Toward a Cap and Trade Scheme Solution: Economic and Legal Instruments to Address the Problem of Externality

Stefano Clò

Subjects: environment, climate change, environmental law, law - academic, environmental law, european law, law and economics


INTRODUCTION 1. A market economy has been generally considered one of the main causes of environmental pollution and degradation, rather than a potential solution to these problems. Economic growth brings about an increasing pollution of the environment and exploitation of exhaustible natural resources. In particular, the combustion of fossil fuels, mainly oil, gas and coal, is at the base of the economic activities of energy and industrial production, as well as transportation. The combustion of these fuels is the major cause of the release of GHG in the atmosphere. This is an external cost because it causes damage and economic losses to third parties spread in time and space that are not likely to be compensated by the polluters. Unless specific rules aimed at ensuring that polluters pay for the environmental damage they generate are introduced, global warming will continue to be de facto a neglected cost that producers and consumers are not required to take into account when performing their activities. As far as private polluters are not required to support the costs of emitting GHG in the atmosphere, climate changing activities will continue, resulting in a non-sustainable outcome. It was Garret Hardin’s seminal article (1968) that argued that when a public resource is freely available to everybody, in the absence of any property rule, each individual will have an incentive to use the resource to maximize its private utility, resulting in a collective over-exploitation and destruction of the resource itself: Each man is locked into a system that...

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