Europe 2020: an Alternative Proposal

The European Union has unilaterally decided to implement a cap & trade scheme to contain greenhouse gases (GHGs) emissions, starting on 1 January 2005. After the First Phase of the Scheme had been concluded on 31 December 2007, emissions from the sectors covered by the European Emissions Trading Scheme (ETS) had actually increased. That is not enough to tell that the scheme didn’t work: there are too little data to perform a credible assessment. The literature on the issue is not unanimous. It seems plausible, however, that some permits over-allocation occurred in 2005, that might explain the not-so-exciting performance of the scheme. In fact, to some extent some overallocation was also acknowledged by the European Commission itself, which adopted more stringent criteria for the Second Phase of ETS (2008-2012). Now the criteria and the rules for the Third Phase (2013-2020) are being debated, with an emphasis over defining even more stringent criteria and a shift from a grandfatherin system in the initial allocation (whereby allowances are initially given free-of-charge on the basis of historical track records for emissions), towards a partial auctioning system (whereby permits are initially given to the highest bidders), with a goal of a full auctioning in 2027. At the same time, safeguard measures are being considered in order to prevent “carbon leakage” (i.e. delocalization due to higher costs of energy) in the energy-intensive economic sectors or sub-sectors that are exposed to international competition. This paper examines the guidelines for the Energy Policy for Europe by assessing its effectiveness in achieving the stated environmental targets, assuming not every country in the world will be willing to pursue similar targets. Subsequently, it identifies the major shortcomings in the European policies, that mostly depend on the complexity and possible politicization of the ETS. Finally, it reviews the possible alternatives, by emphasizing the benefits that a revenue-neutral carbon tax might deliver both in terms of reaching the environmental goals, and of the policy’s efficiency and allocational efficiency. Two models of carbon tax are considered: one defined on the basis of the expected social cost from GHGs emissions, the other dependent on a state function that measures the degree of global warming in any given year.