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Emissions Trading Hybrids: The Case of the EU ETS

Author

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  • Woerdman Edwin
  • Nentjes Andries

    (Faculty of Law, Department of Business Law, European Law and Tax Law, University of Groningen, PO Box 716, Groningen9700 AS, the Netherlands)

Abstract

We argue that the European Union Emissions Trading System (EU ETS) has evolved into a hybrid of two design variants, allowance trading (cap-and-trade) and credit trading (performance standard rate trading), with an added feature of industry support to minimize carbon leakage. In particular the current rules tying free allowances to production capacity expansion, plant closure and capacity use have transformed the efficient cap-and-trade program that stood at the origins of the EU ETS into a system that even surpasses credit trading in paying hidden product subsidies to firms. This combination of rules encourages an inefficiently high level of investment in production capacity and an inefficiently high output in industries exposed to international competition. The result is a sub-optimal EU Emissions Trading ‘Hybrid’ (which we therefore label as ‘EU ETH’).

Suggested Citation

  • Woerdman Edwin & Nentjes Andries, 2019. "Emissions Trading Hybrids: The Case of the EU ETS," Review of Law & Economics, De Gruyter, vol. 15(1), pages 1-32, March.
    • Handle: RePEc:bpj:rlecon:v:15:y:2019:i:1:p:32:n:1
    DOI: 10.1515/rle-2014-0054
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    References listed on IDEAS

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    More about this item

    Keywords

    European Union Emissions Trading System; economic efficiency; cap-and-trade; performance standard rate trading; carbon leakage;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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