Climate Change and European Emissions Trading
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Climate Change and European Emissions Trading

Lessons for Theory and Practice

Edited by Michael Faure and Marjan Peeters

This timely book focuses on the EU-wide greenhouse gas emissions trading scheme for major sources. It combines legal and economic approaches and reviews the major revision of this scheme. A distinguished range of authors assess the experiences thus far and also consider future development from both theoretical and practical perspectives. They also discuss many design options, including auctioning, credit and trade, the inclusion of aviation emissions, and linking possibilities. Moreover, attention is paid to the role of legal principles, the role of case law, and to aspects of democratic accountability within an emissions trading scheme. Ways to avoid carbon leakage and the role of national climate policies are also discussed. This book makes clear that the economic efficiency and effectiveness of an emissions trading scheme depend to a large extent on the specific legislative choices, and hence the legislative design of such a scheme deserves meticulous attention.
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Chapter 8: Economic Impacts of the EU ETS: Preliminary Evidence

Onno Kuik and Frans Oosterhuis


Onno Kuik and Frans Oosterhuis 1. INTRODUCTION Emissions trading has always been advocated by many economists as a more cost-effective instrument to reduce emissions in comparison with direct regulation. The basic idea, developed by Dales,1 is that a cap on total emissions, combined with free trading in emission allowances between polluters, ensures that pollution abatement will take place where it can be done at the lowest costs. In principle, therefore, emissions trading will always lead to net efficiency gains and have a positive impact on overall welfare, unless transaction costs are very high or serious market failures exist. Nevertheless, there has been much discussion about possible negative economic impacts of the EU ETS. Clearly, it was not the instrument of emissions trading itself that was expected to adversely affect industry’s production costs and competitiveness. What raised concern was the mere fact that restrictions were imposed on emitting CO2, whereas in the past this could be done freely, and whereas the global competitors as well as most sectors outside the large energy intensive industry were not confronted with such restrictions. This competitive advantage for industries outside the EU might lead to a shift of ‘carbon-intensive’ production to those countries, implying ‘carbon leakage’ with no net reduction of global CO2 emissions as a result. The (almost completely) free allocation of allowances in the first stages of the EU ETS has done much to make emissions trading an acceptable instrument to industry.2 Moreover, the private sector has discovered the inherent ‘business opportunity’...

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