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Summary of the main findings

The Subsidisation of Heavy Polluters under Emissions Trading Schemes

Elena de Lemos Pinto Aydos

Chapter 7 presents a summarised version of the key findings of this book. While the EU ETS, the AUS CPM and the NZ ETS have all subsidised emissions-intensive industries, the consequences of this regulatory model have, in general, escaped the scrutiny of legal scholars. The book closes with an important message, that despite formally participating in ETSs, many heavy polluters are not yet paying their fair share of the carbon price. Keywords: Emissions Trading – EU ETS – Free Allocation – World Trade Organization –Agreement on Subsidies and Countervailing Measures

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Reconsidering the eligibility thresholds for the free allocation of permits

The Subsidisation of Heavy Polluters under Emissions Trading Schemes

Elena de Lemos Pinto Aydos

Chapter 4 focuses on carbon leakage in practice and real life examples of the use of free allocation as an industry assistance measure. It demonstrates that jurisdictions linking independent ETSs would benefit from harmonising the free allocation methodologies in order to minimise the competitiveness concerns and to reduce the trade distortions and other impacts inherent to the free allocation system. It proposes a review of the general thresholds in order to assess the exposures to carbon leakage so as to improve the effectiveness and fairness of the ETSs. The two final key recommendations are the removal of the sole trade-exposure factor from the quantitative assessment in the EU ETS and increasing the stringency of all the thresholds to determine emissions-intensity. Keywords: carbon leakage – free allocation – emissions intensity – trade exposure – linking – competitiveness

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Real world emissions trading schemes: challenges and lessons learnt

The Subsidisation of Heavy Polluters under Emissions Trading Schemes

Elena de Lemos Pinto Aydos

Chapter 3 introduces the three case studies, that is, the European Union Emissions Trading System (EU ETS), the New Zealand Emissions Trading Scheme (NZ ETS) and the Australian Carbon Pricing Mechanism (AUS CPM). The chapter provides the reader with a basic understanding of the key elements of each ETS, such as the coverages, emissions caps, governance regimes and links with other schemes. It also reflects on the main achievements and challenges particular to each scheme. For example, the significant problems with surplus emissions permits experienced by the EU ETS, the process that led to the repeal of the CPM in Australia and the distinctiveness of the NZ ETS, which has been resilient and stable, despite significant changes in the country’s approach towards international climate change negotiations. Keywords: European Union Emissions Trading System (EU ETS) – New Zealand Emissions Trading Scheme (NZ ETS) – Australian Carbon Pricing Mechanism (AUS CPM)

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Paying the Carbon Price

The Subsidisation of Heavy Polluters under Emissions Trading Schemes

Elena de Lemos Pinto Aydos

Paying the Carbon Price analyses the practice of freely allocating permits in Emissions Trading Schemes (ETSs) and demonstrates how many heavy polluters participating in ETSs are not yet paying the full price of carbon. This innovative book provides a framework to assist policymakers in the design of transitional assistance measures that are both legally robust and will support the effectiveness of the ETSs whilst limiting negative impacts on international trade.
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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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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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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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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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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.