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Carbon leakage and industry assistance

The Subsidisation of Heavy Polluters under Emissions Trading Schemes

Elena de Lemos Pinto Aydos

Chapter 2 discusses the theory of carbon leakage and competitiveness concerns in relation to emissions-intensive and trade-exposed sectors participating in ETSs. Two measures are often considered as alternatives to avoid competitiveness issues and carbon leakage from the implementation of ETSs, that is, border carbon adjustments (BCA) and the free of cost allocation of permits. While BCAs are not very popular, it is possible that, due to the adoption of free allocation of permits, carbon-pricing schemes have been failing to implement the polluter pays principle. Keywords: emissions trading – carbon leakage – free allocation – polluter pays principle

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Isabella Neuweg and Alina Averchenkova

Chapter 3 contains an in-depth analysis of climate policy in the world’s largest greenhouse gas emitters – China, the European Union and the USA. The chapter details how they each face their unique challenges and how they have taken different routes in developing and implementing climate policy. China’s approach to climate policy reflects a governance system that is driven more by executive orders than acts of parliament. Accordingly, China has chosen to embed its climate change objectives in successive Five-Year-Plans. In the EU, policy making requires agreement across member states. Member states have decided to make climate policy an EU matter, setting binding EU-wide targets on carbon emissions, renewable energy and energy efficiency, and setting up a pan-European emissions trading scheme. US policy makers have taken a regulatory approach, with federal action based on an existing piece of legislation, the 1990 Clean Air Act. This reflects the contested nature of climate change policy, which has made it difficult to pass meaningful climate change legislation at the federal level. However, many states have moved ahead of the federal level, often enacting world-leading climate legislation.

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Michal Nachmany, Achala Abeysinghe and Subhi Barakat

Chapter 4 describes the unique challenges of least developing countries (LDCs) in climate policy and traces their growing engagement on climate change. The motivations and challenges of LDCs are very different from those of industrialized economies, due both to their low emissions profile and their high vulnerability to climate impacts. As energy-related emissions are low, the transition to a low-carbon economy of LDCs simultaneously serves mitigation, adaptation and development objectives. However, integrating climate change into general development plans remains a challenge, and fewer than half of the LDCs have done so. Other focus areas are disaster risk reduction, climate resilience, land use change and access to international climate finance, although there is less legislative activity in these areas. A growing number of countries are contemplating dedicated climate laws, but climate action is still predominantly pursued through policies and executive instruments, rather than formal acts of parliament.

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Alina Averchenkova and Sini Matikainen

Chapter 10 discusses the interplay between national climate legislation and international efforts to combat climate change. The chapter outlines the key implications of the Paris Agreement for domestic law making and assesses the consistency of domestic mitigation efforts by the G20 group of countries with the Paris objectives. To be consistent with their nationally determined contributions (NDCs) to the Paris Agreement countries will need to adjust not just the level, but also the time frame and scope of their domestic climate targets. The majority of countries have yet to adopt a domestic emission target that is consistent with their NDCs. For Paris to be successful, countries also need to put more emphasis on ensuring the credibility and faithful implementation of their commitments. Success also demands a more systematic assessment of the adequacy of domestic efforts and improved national processes for monitoring, reporting and verification. Monitoring progress should focus not only on whether targets are being met, but also on their consistency with the 1.5–2°C pathway agreed in Paris.

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Ibon Galarraga, Elisa Sainz de Murieta and Joan França

Chapter 8 discusses how national climate legislation is complemented by action at the regional, state and municipal level. The importance of sub-national actors is increasingly recognized in the international negotiations, and the Paris Agreement includes an explicit requirement to integrate climate policies across all levels of government. Responsibility for the implementation of national policies in key areas such as energy, transport and the environment is often devolved to the sub-national level. This gives cities and regions a formal role in national efforts to reduce emissions. Sub-national actors are also central to climate resilience. Adaptation to climate change is very context-specific and requires the close involvement of local stakeholders. The chapter documents how sub-national governments are often taking the lead in climate policy, assuming commitments that can exceed those made at national level. However, the coexistence of regional and national climate policies can create coordination problems and a high degree of collaboration among all levels of governance is essential.

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Contextualising the issue

The Subsidisation of Heavy Polluters under Emissions Trading Schemes

Elena de Lemos Pinto Aydos

Chapter 1 introduces the book and the book chapters. It discusses the exponential increase in anthropogenic greenhouse gas (GHG) emissions in the past decades and outlines the most recent global emissions trends. The chapter then introduces the Paris Agreement and the key domestic climate change policies that are being adopted by countries in order to meet their intended nationally determined contribution (INDCs). Carbon pricing has been increasingly adopted by countries aiming to mitigate GHG emissions. However, even now, many heavy polluters participating in emissions trading schemes (ETSs) are not paying the full price of carbon. Keywords: climate change – greenhouse gas (GHG) emissions – Paris Agreement – intended nationally determined contribution (INDCs) – carbon taxes – emissions trading schemes (ETSs)

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Free allocation and linking emissions trading schemes: the case for harmonisation

The Subsidisation of Heavy Polluters under Emissions Trading Schemes

Elena de Lemos Pinto Aydos

Chapter 5 examines aspects of the design of the free-allocation methods that might lead to competitiveness distortions. It reviews the data from the first and second trading periods of the EU ETS, when the different Member States had their own separate National Allocation Plans (NAPs). In the EU ETS context, the different allocation rules generated concerns over the competitiveness of industries subject to the different NAPs. By analogy, key design elements in the legal framework of the EU ETS and the AUS CPM would be problematic from a trade perspective. For example, the uneven benchmarks and output-based allocation versus the historical emissions data, which could result in a significant variation of the allocation levels, with the potential to impact trade and distort competition between liable installations under the independent ETSs. Keywords: emissions trading – National Allocation Plans (NAPs) – allocation – trade – competition – EU ETS – industry sectors

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The free allocation of permits and the WTO discipline of subsidies

The Subsidisation of Heavy Polluters under Emissions Trading Schemes

Elena de Lemos Pinto Aydos

The literature has extensively analysed the legal implications of the free allocation system from the perspective of the World Trade Organization (WTO) laws on subsidies. However, the absence of an interdisciplinary approach resulted in a lack of detailed understanding of the functioning of the ETSs, the free allocation methodology and the economic aspects of distributing permits free of cost. Chapter 6 closes the gap between the doctrinal analysis of the Agreement on Subsidies and Countervailing Measures (SCM Agreement), the legal frameworks of these schemes in practice and the economic research data. Chapter 6 concludes that the free allocation of permits is a subsidy in accordance with the definition in the SCM Agreement and analyses whether it could be a prohibited or actionable subsidy, according to the different thresholds for allocation and the levels of assistance set by each scheme. In relation to the EU ETS sole emissions-intensity threshold, it is arguably perpetuating a targeted subsidisation of a small number of enterprises from the cement sector, which had already been favoured by the decentralised NAPs during the first and second trading periods. As such, it is an actionable subsidy and may be challenged if it causes adverse effects on other WTO Members. The chapter recommends the removal of the sole emissions-intensity factor from the EU ETS quantitative assessment. The recent proposal for a Directive to amend the EU ETS is partially in line with this recommendation. Keywords: World Trade Organization (WTO) – subsidies – free allocation – emissions trading – Agreement on Subsidies and Countervailing Measures (SCM Agreement) – actionable subsidy – prohibited subsidy – cement – EU ETS

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Alex Bowen and Sam Fankhauser

Chapter 7 reviews the policy measures required to reduce greenhouse gas emissions. They constitute the core content of climate change legislation. The starting point of the chapter is an understanding of the market, policy and behavioural failures that prevent private decision makers from adopting low-carbon solutions on their own accord. The chapter advocates carbon pricing as an effective way of incentivizing emission reductions, although command-and-control interventions are equally possible and have often been successful. Additional problems that need to be addressed include failures in capital markets, externalities related to low-carbon innovation, network issues and barriers preventing the uptake of energy efficiency measures. There are also policy distortions, not least the subsidization of fossil fuels and the underpricing of energy. The chapter further recommends interventions to mitigate the wider socioeconomic impacts of carbon policies, in particular their effect on competitiveness and fuel poverty. These measures do not directly reduce emissions, but they make climate change policy fairer, less disruptive and more acceptable to the public.

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Alina Averchenkova and Michal Nachmany

Chapter 6 discusses the institutional arrangements for climate change policy. Climate action is complex and often controversial. It needs an institutional framework to legitimize, execute and scrutinize the targets and measures that have been put in place. Appropriate institutional arrangements will vary from country to country and depend on the political economy, institutional history and other local factors. Yet certain key functions are common to and important for any arrangement. The institutional framework needs to ensure policies are durable, legitimate and effective. This requires the clear delineation of responsibilities, including between national and sub-national actors, mechanisms for stakeholder engagement and an efficient state bureaucracy. It may also require the creation of new dedicated bodies, for example to set and scrutinize targets, to mobilize and channel climate finance and for monitoring, reporting, verification (MRV).