Lessons for Theory and Practice
Edited by Michael Faure and Marjan Peeters
Chapter 5: European Emissions Trading and the Polluter-Pays Principle: Assessing Grandfathering and Over-Allocation
Edwin Woerdman, Stefano Clò and Alessandra Arcuri* 1. INTRODUCTION The European Union (EU) holds an Emissions Trading Scheme (ETS) for carbon dioxide (CO2) and other greenhouse gases. This market has been up and running since 2005, based on Directive 2003/87/EC. It is a ‘cap-and-trade’ scheme that allocates emission caps to polluters. This means that their emission targets are based on absolute standards that define emission ceilings. When a polluter manages to keep emissions below his ceiling, he can sell this surplus in the form of emission rights, called ‘allowances’, to a polluter that wishes to increase emissions (e.g. Woerdman, 2005). To create political acceptability, ‘grandfathering’ has been used as the primary method of allocating the allowances. This means that polluters received most emission rights free of charge primarily based on their historical emissions, so that they did not have to buy rights in an auction. As stated in Article 10 of Directive 2003/87/EC, every EU Member State was required to allocate at least 95% of the allowances free of charge for the three-year period 2005–2007 and at least 90% of the allowances free of charge for the five-year period 2008–2012. However, a popular perception in the economic and legal literature is that grandfathering is inconsistent with the polluter-pays principle. ‘Free allocation * Corresponding author: Dr. E. Woerdman (Associate Professor of Law and Economics), University of Groningen, Faculty of Law, Department of Law and Economics, P.O. Box 716, 9700 AS Groningen, The Netherlands, Telephone + 31 50 363 5736, e-mail:...
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