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Francesco Gullì

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Karoline S. Rogge

The Paris Climate Agreement calls for decarbonization of the economy in the second half of this century. This requires a radical redirection and acceleration of technological change towards low- and particularly zero-carbon solutions. Global carbon pricing is seen as a key enabler for such decarbonization, with the European Union’s Emission Trading System (EU ETS) serving as an important pillar. This chapter reviews the evidence on the innovation impact of the EU ETS. The review shows a very limited effect of the scheme on technological innovation, but there are clear signs of it having stimulated organizational innovation, with the impact being more pronounced for the electricity sector than for industry. The initially high expectations of the EU ETS regarding technological innovation largely dissipated once the scheme’s lack of stringency became apparent and prices collapsed accordingly. Also, for many of the rather incremental innovations that have taken place, the EU ETS was shown to be only one contributing factor among others, with the broader policy mix and long-term targets playing a particularly pivotal role in stimulating innovation. In contrast, there is clear evidence that the EU ETS has been a key driver of various organizational innovations, including making climate change a top management issue. However, so far, these organizational innovations have only had limited effects on shifting corporate strategies towards low-carbon solutions because of low carbon prices, the relatively high share of free allocations in industry, and more pressing business concerns. Despite this, the scheme’s positive impact on organizational innovations should not be underestimated, as these constitute a necessary precondition for future technological innovations. The findings suggest that the Commission’s proposal for the fourth trading period of the EU ETS points in the right direction, but further efforts will be needed to significantly increase the scarcity of EU allowances and the share of auctioning in order to fully unleash the scheme’s transformative power. If the identified shortcomings are not addressed, the EU ETS cannot play its intended role in guiding the decarbonization of the European economy, for which innovations in low-carbon solutions are a fundamental requirement.
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Daniel H. Cole

This chapter surveys the origins of emissions trading in theory and early practice, from John Dales’ initial explication of the instrument through its first large scale experiment in the 1990 US Clean Air Act Amendments.
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Andreas Tuerk and Andrej F. Gubina

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Stefan E. Weishaar

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Josephine van Zeben

Within economic theory, emission trading schemes have long been advocated for their relative simplicity and their allocative and dynamic efficiency. Despite these apparent strengths, regulators have only recently started to meaningfully incorporate emission trading into their toolbox. This chapter focuses on an implementation challenge that does not necessarily present itself as such: litigation. Experiences with the EU ETS have made the potential impact of litigation on ETS development an increasingly salient issue for regulators. Nonetheless, the implications of litigation for the design and functioning of an ETS are less clear than some of the other implementation challenges. This chapter provides an analytical overview of the types of litigation that ETS are exposed to and the ways in which these different categories of litigation can, and have, affect(ed) ETS design and development.
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Katherine Nield and Ricardo Pereira

The broad involvement and diversity of products within the European Emissions Trading Scheme (EU ETS) has been important in driving liquidity and market efficiency and has itself fuelled further market growth. But as the EU carbon market has grown in size, value and complexity it has become an increasingly attractive playground for fraudsters. Fraud has materialised on this market in a variety of sophisticated forms, including Value Added Tax (VAT) carousel fraud and emissions allowance thefts. In recognition of specific vulnerabilities within the EU ETS trading system, significant changes to the way that emissions allowances are traded were introduced to the Registry Regulation in 2013, as well to the EU financial markets regulations in 2012–2014, in an attempt to strengthen the EU ETS against financial crimes. This chapter examines the major forms of fraud that have affected the EU ETS, and highlights specific characteristics of emissions allowances and the registries system through which they are traded that have made the EU ETS especially vulnerable to fraud. Moreover, it discusses the regulatory reforms that have been implemented at both EU and national levels to address these vulnerabilities.
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Marjan Peeters and Huizhen Chen

This chapter aims to further the debate regarding the role of law for establishing an adequate enforcement strategy for an emissions trading scheme. We focus on sanction regimes within the EU ETS and the Chinese emissions trading pilot projects. Section 2 sets the scene by pointing at the need of an adequate enforcement approach and related legal scholarship. Section three presents the specific case of the EU ETS, established by Directive 2003/87/EC from 2003, while section 4 turns to the recently developed greenhouse gas emissions trading pilot projects in China. In particular, sections 3 and 4 focus on sanctions for excess emissions, discussing recent case law regarding penalties for emissions trading within the EU and specific enforcement approaches in the emerging emissions trading regimes in China. Section 5 concludes, highlighting that proper evaluation of compliance with emissions trading regimes is a challenge in itself, not only for governments, but also for academics who want to gain further insights into how emissions trading regimes work in the practice of different legal systems. In conclusion, access to information regarding compliance and enforcement with an emissions trading regime needs to be further explored, not only for China but also for the EU.
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Elena Kosolapova

This chapter discusses the international liability of single major greenhouse gas (GHG) emitters. It demonstrates that the international climate regime is not equipped with a liability mechanism and that the current approaches to state liability in international law are incapable of addressing climate change-related damage. Obstacles to domestic climate change liability are also identified. The chapter then goes to show that both States and private enterprises – even those operating within or falling under an emissions trading system (ETS) – are bound by the international customary law obligation to prevent significant transboundary harm. It examines how the procedural and substantive duties related to this obligation can provide the legal basis for challenging single emissions sources.
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Kateryna Holzer