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Implementing CDM Limits in the EU ETS: A Law and Economics Approach

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  • Alexander Vasa

Abstract

The EU Emissions Trading Scheme (EU ETS) is the main instrument to reduce greenhouse gas emissions in Europe. Subject to a country specific limit, installations in the EU ETS can use EU allowances (EUA) and certified emissions reductions (CERs) generated through the Clean Development Mechanism (CDM) to fulfil their emission reduction target. The CDM encourages and finances emission reduction projects in developing countries. The basis for the implementation of a CDM usage limit is the supplementarity criteria, which was established to ensure that developed countries only cover part of their compliance obligations with emissions reductions abroad. The CDM limits are differentiated between EU member states to cater to the different levels of emission reduction ambitions, the progress made when the limits were established and the ability of the Member State to reduce emissions. The binding limits created substantial arbitrage rents, due to the CER-EUA spread in the range of 200 million Euro for the year 2008. This paper discusses different options for the allocation of this rent. The paper finds that making the right to use CERs tradable or the regulator precommitting to buying CERs at the level of the limit reduces the inefficiencies connected to the current regulation. Auctioning these CER usage rights furthermore shifts the rents created through the CER-EUA spread to the state. Both the EU ETS and the CDM are scrutinised by academics, industry and non-governmental institutions according to their efficiency and environmental effectiveness. The debate about wind-fall profits has shown that climate policies need to be designed carefully. In light of improving the EU ETS, the use of CDM and in light of upcoming regional emissions trading schemes in other developed economies, this paper shows how CDM limits can be designed more efficiently.

Suggested Citation

  • Alexander Vasa, 2010. "Implementing CDM Limits in the EU ETS: A Law and Economics Approach," Discussion Papers of DIW Berlin 1032, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1032
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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.358462.de/dp1032.pdf
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    References listed on IDEAS

    as
    1. Zhang, ZhongXiang, 2001. "An assessment of the EU proposal for ceilings on the use of Kyoto flexibility mechanisms," Ecological Economics, Elsevier, vol. 37(1), pages 53-69, April.
    2. A. Ellerman & Barbara Buchner, 2008. "Over-Allocation or Abatement? A Preliminary Analysis of the EU ETS Based on the 2005–06 Emissions Data," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 41(2), pages 267-287, October.
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    Cited by:

    1. Sabine Aresin, 2015. "Monitoring Abatement in the Presence of an Import Quota on CERs," Working Papers tax-mpg-rps-2015-11, Max Planck Institute for Tax Law and Public Finance.
    2. Kamleshan Pillay & Jorge E. Viñuales, 2016. "“Monetary” rules for a linked system of offset credits," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 16(6), pages 933-951, December.

    More about this item

    Keywords

    Clean Development Mechanism; Emissions Trading; Climate Policy; Efficiency;

    JEL classification:

    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • 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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