Scarcity and Allocation of Allowances in the EU Emissions Trading Scheme - A Legal Analysis (original) (raw)

39 Pages Posted: 30 Jan 2008

Date Written: September 1, 2007

Abstract

The European Union Emission Trading Scheme (EU ETS) for CO2 emissions was launched in 2005 but, by February 2007, prices had collapsed, destroying any incentive to invest in cleaner technologies. This outcome was compounded by the mode of allocation, based mainly on grandfathering, which favoured CO2-intensive operators and led to windfall profits. This paper discusses the failure of this promising new instrument in a two-step process. The first examines the rules which govern the setting of the cap, as this determines the environmental quality of the scheme. The second looks at the criteria guiding the allocation process. It analyses, in particular, how the Commission assessed the national allocation plans (NAPs) and why its scrutiny regarding the second trading period led to numerous legal claims. The study concludes that a system, whose success essentially depends on the stringency of its overall cap, must either delegate this decision to an independent authority or give it the necessary powers to enforce scarcity and determine equitable allocation criteria. Second, a scheme, which decentralises important decisions regarding its design, can only function if its members are sufficiently homogeneous and committed to ensuring its efficiency. This is probably not true of the EU ETS.

Keywords: european union emission trading scheme, allocation, national allocation plans, scarcity allocation plans, scarcity

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