Transaction costs for firms in the EU ETS: lessons from Ireland

Until now, there has been little empirical evidence that EU Emissions Trading Scheme (ETS) transaction costs are incurred at firm level. The transaction costs (internal costs, capital costs, consultancy and trading costs) incurred by Irish firms under the EU ETS during its pilot phase (2005–2007) were measured and analysed. Evidence for the sources of transaction costs, their magnitude and the distribution of costs shows that these were mainly administrative in nature. Considerable variation in costs was found due to economies of scale, as the costs per tonne of CO₂ were lower for participants with larger allocations. For the largest firms—accounting for over half the emissions—average transaction costs were €0.05 per tonne. However, for small firms, average transaction costs were €2.02—over 18% of the current allowance price. This supports the concerns that transaction costs are excessive for smaller participants. The immediate policy implication is that additional attention will be needed to address different sizes of firms, number of installations per firm, and the size of the initial allocations.     

The impact of administrative transaction costs in the EU emissions trading system

This article empirically investigates the impact of transaction costs for monitoring, reporting, and verification (MRV) of emissions on companies regulated by the EU Emissions Trading System (EU ETS) in Germany. Based on a unique panel dataset, we investigate if MRV costs are dependent on the amount of annual emissions of regulated companies and if there are differences in transaction costs between economic sectors. The results indicate that administrative costs are dependent on the amount of annual emissions for larger companies, which has implications for the economic efficiency of the EU ETS. The most important finding, however, is that there are significant differences in MRV transaction costs dependent on the type and size of companies. This implies the existence of considerable economies of scale. Overall, the EU ETS could benefit from reforms by means of a push towards upstream regulation as this would likely increase administrative efficiency.

Policy relevance statement

Transaction costs are, among other things, an important aspect of market-based climate policy design. A policy instrument with low transaction costs is preferred over instruments with larger transaction costs under equal conditions. This is occasionally referred to as administrative efficiency, and its importance was acknowledged in directive 2009/29/EC of the European Commission. Thoughtful empirical examination of transaction costs is essential in order to inform about the extent and impact of these costs. This article provides an analysis of transaction costs for monitoring, reporting, and verification (MRV) of emissions in the EU ETS. It is shown that administrative costs will likely have negative effects on the cost efficiency of the EU ETS. However, the most relevant finding is that small companies (<250 employees) or firms emitting small amounts of carbon dioxide per year face far higher average transaction costs compared with larger firms or emitters. Thus, there is a tendency for the EU ETS to cause MRV transaction costs that are disadvantageous for small companies. A regulation that is more upstream-oriented could mitigate this negative effect to some extent. The EU ETS could initiate a reform that is targeted on putting a price on the carbon content of fossil fuels instead of directly regulating emissions in a so-called ‘end-of-the-pipe’ way at the installation level.     

EU emissions trading and the cement sector: a spatial competition analysis

An oligopoly competition model is described and used to illustrate the potential effect of EU emissions trading and transport issues on the production decisions and profitability of cement producers in a typical western European country market. The role of geography is introduced from three viewpoints: the existence of regional markets, the fact that EU producers may operate multiple plants across these regions, and the possibility of production capacity constraints. A typical EU state is divided into a coastal region which is initially exposed to international competition, and an inland region which is initially protected. Assuming pure auctioning of EU Allowances and a range of CO₂ prices up to €50/t, our model predicts a large increase of imports into the coastal region. Consequences for the inland producers include reduced attractiveness of the coastal market, as well as increased competition from coastal producers and from non-EU imports. The model includes a number of simplifications and therefore does not claim to offer definitive predictions, but our results do suggest that an increase in non-EU imports could feasibly offset more than 70% of the decrease in EU cement sector emissions. The likely impact on producer profits is considered for each region, and the advantages and disadvantages of potential mitigating policy measures are reviewed for either the EU Allowance allocation process or border adjustments on cement products.     

The effectiveness of the EU Emissions Trading Scheme

How effective is the EU Emissions Trading Scheme (EU ETS) in promoting emissions reduction for compliance with the Kyoto Protocol commitment? A theoretical benchmark is determined in order to assess the stringency of the ETS cap and to evaluate whether emissions allowances have been over-allocated. This analysis clarifies how the emissions reduction effort has been divided between ETS and non-ETS sectors, highlighting the extent to which Member States effectively rely on the ETS to comply with their Kyoto commitments. Finally, inefficiencies relating to the over-allocation of allowances are analysed; namely cross-subsidization from non-ETS to ETS sectors, national subsidies to the ETS sectors, and distortion of competition.     

Certified emissions reductions and CDM limits: revenue and distributional aspects

The EU allows those installations that are subject to emissions trading to use a limited volume of certified emissions reductions (CERs), generated through the Clean Development Mechanism (CDM), to cover their own GHG emissions. These CERs can be used in addition to the EU allowances (EUAs), which were primarily allocated free to installations in Phase II of the EU Emissions Trading Scheme (EU ETS) from 2008 to 2012. For the year 2008, the CER limits, which are differentiated by EU Member State, created substantial arbitrage rents (due to the CER-EUA spread) of approximately EU€250 million. Different options for the allocation of this rent are discussed and it is found that, according to economic theory, making the right to use CERs tradable or the regulator pre-committing to buying CERs at the level of the relevant limit reduces the inefficiencies connected to the current regulation. Furthermore, auctioning these CER usage rights shifts the rents created through the CER-EUA spread to the Member State itself. The improved design and implementation of CDM limits justifies EU policy makers intervening to correct previously competition-distorting choices.     

Distributional choices in EU climate policy: 20 years of policy practice

The distributional choices of the EU in three policy phases, spanning 20 years, are examined: the negotiations on emissions reduction targets for the EU15 under the first commitment period of the Kyoto Protocol, the negotiation of National Allocation Plans for Phase II of the EU Emissions Trading Scheme (ETS) between 2008 and 2012, and the formulation of the 2008 Climate and Energy Package for the period 2013–2020. A flexible and pragmatic framework, consisting of the normative principles of capacity, responsibility, equality, and need, is used to elucidate the indicators and policies used in deciding how the EU Member States are to share the cost of meeting climate policy objectives. The analysis extends the literature by applying a common analytical framework across the three different policy phases and provides a structured basis for the assessment of what the EU and other jurisdictions can learn from them.

Policy relevance

Distributing the cost of climate policy is a key policy concern, both at the domestic and international level. The EU has more than 20 years of policy experience with such distributional choices and is also preparing the next steps of its policy, where distributional choices will again be central. A framework is developed to assess the modalities and rationale for EU distributional choices in order to inform the future climate policy of the EU and other jurisdictions.     

The tools of climate adaptation policy: analysing instruments and instrument selection

Governments have a key role to play in the process of climate adaptation, through the development and implementation of public policy. Governments have access to a diverse array of instruments that can be employed to adapt their operations and influence the behaviour of individuals, organizations, and other governments. However, the choice of policy instrument is political, because it affects the distribution of benefits and costs, and entrenches institutional procedures and resources that are difficult to redeploy. This article identifies four key governing resources that governments employ in the service of adaptation and analyses these resources using criteria drawn from the policy studies literature. For each category, specific policy instruments are described, and examples are provided to illustrate how they have been used in particular jurisdictions. The article also discusses instrument selection, focusing on trade-offs among the instrument attributes, processes for setting the stage for instrument choice, jurisdictional constraints on instrument selection, and ways to avoid negative vertical and horizontal policy interplay.

Policy relevance

Adaptation is a nascent field of public policy, and courses of action to reduce vulnerability and build adaptive capacity are in their infancy. This article contributes to policy development and analysis by identifying the range of policy instruments available to governments and analysing concrete ways in which they are employed to implement adaptation policy objectives. Taking stock of these adaptation tools and comparing their behavioural assumptions and attributes helps to illuminate potential policy options, and to evaluate their technical viability, political acceptability, and economic feasibility. Providing examples of how these instruments have been implemented successfully in other jurisdictions offers ideas and lessons for public officials.     

The impact of the unilateral EU commitment on the stability of international climate agreements

The negotiation strategy of the European Union was analysed with respect to the formation of an international climate agreement for the post-2012 era. Game theory was employed to explore the incentives for key players in the climate policy arena to join future climate agreements. A ?20% unilateral commitment strategy by the EU was compared with a multilateral ?30% emission reduction strategy for all Annex-B countries. Using a numerical integrated assessment climate—economy simulation model, we found that leakage, in the sense of strategic policy reactions on emissions, was negligible. The EU strategy to reduce emissions by 30% (compared with 1990 levels) by 2020, if other Annex-B countries follow suit, does not induce the participation of the USA with a comparable reduction commitment. However, we argue that the original EU proposal can be reshaped so as to stabilize a larger and more ambitious climate coalition than the Kyoto Protocol in its first commitment period.     

Alternative climate policy pathways in the US

Although it is likely that the political–economic coalition required for implementing a federal cap-and-trade programme for GHGs in the US is now sufficiently strong, the structural impediments that have prevented its legislative passage remain impressively durable and can be expected to continue to lay waste to congressional proposals for the foreseeable future. Indeed, given the complex history of environmental policy gridlock in Washington since the early 1980s, any expectations that a cap-and-trade programme could have been realistically achieved through the traditional legislative passage in Congress are fundamentally misplaced. Building on previous research, it is argued that – as with most other forms of environmental policy in the US over the past three decades – a national carbon market is more plausible given alternative policy pathways, which if taken are capable of circumventing the Federal Congress altogether. In particular, the interaction between litigation against the federal government and the ‘rulemaking’ authority possessed by the Executive Branch provides the potential space for the current administration to unilaterally establish a model rule for a national carbon-trading programme.

Policy relevance

This article aims to contribute to American climate policy debates by re-thinking the policy mechanisms most capable of establishing a national carbon market in the US. By taking into account the array of structural factors that have prevented the legislative passage of such a programme in federal Congress, a range of alternative policy ‘pathways’ is considered that have historically allowed progressive environmental policies to endure in Washington (despite increased Congressional gridlock over the past few decades). Two specific alternative strategies and the relationship between them are assessed: the use of litigation to impose legal obligations on federal agencies to regulate effluents, and the use of executive authority to define the nature and scope of environmental regulation. The administration's current potential to unilaterally develop a model-rule for a cap-and-trade programme under the Clean Air Act is emphasized, and the political implications of such a strategy are considered.     

The impact of shale gas on the costs of climate policy

The use of shale gas is commonly considered as a low-cost option for meeting ambitious climate policy targets. This article explores global and country-specific effects of increasing global shale gas exploitation on the energy markets, on greenhouse gas emissions, and on mitigation costs. The global techno-economic partial equilibrium model POLES (Prospective Outlook on Long-term Energy Systems) is employed to compare policies which limit global warming to 2°C and baseline scenarios when the availability of shale gas is either high or low. According to the simulation results, a high availability of shale gas has rather small effects on the costs of meeting climate targets in the medium and long term. In the long term, a higher availability of shale gas increases baseline emissions of greenhouse gases for most countries and for the world, and leads to higher compliance costs for most, but not all, countries. Allowing for global trading of emission certificates does not alter these general results. In sum, these findings cast doubt on shale gas’s potential as a low-cost option for meeting ambitious global climate targets.

POLICY RELEVANCE

Many countries with a large shale gas resource base consider the expansion of local shale gas extraction as an option to reduce their GHG emissions. The findings in this article imply that a higher availability of shale gas in these countries might actually increase emissions and mitigation costs for these countries and also for the world. An increase in shale gas extraction may spur a switch from coal to gas electricity generation, thus lowering emissions. At the global level and for many countries, though, this effect is more than offset by a crowding out of renewable and nuclear energy carriers, and by lower energy prices, leading to higher emissions and higher mitigation costs in turn. These findings would warrant a re-evaluation of the climate strategy in most countries relying on the exploitation of shale gas to meet their climate targets.     

The challenges of monitoring national climate policy: learning lessons from the EU

One of the most central and novel features of the new climate governance architecture emerging from the 2015 Paris Agreement is the transparency framework committing countries to provide, inter alia, regular progress reports on national pledges to address climate change. Many countries will rely on public policies to turn their pledges into action. This article focuses on the EU’s experience with monitoring national climate policies in order to understand the challenges that are likely to arise as the Paris Agreement is implemented around the world. To do so, the research employs – for the first time – comparative empirical data submitted by states to the EU’s monitoring system. Our findings reveal how the EU’s predominantly technical interpretation of four international reporting quality criteria – an approach borrowed from reporting on GHG fluxes – has constrained knowledge production and stymied debate on the performance of individual climate policies. Key obstacles to more in-depth reporting include not only political concerns over reporting burdens and costs, but also struggles over who determines the nature of climate policy monitoring, the perceived usefulness of reporting information, and the political control that policy knowledge inevitably generates. Given the post-Paris drive to achieve greater transparency, the EU’s experience offers a sobering reminder of the political and technical challenges associated with climate policy monitoring, challenges that are likely to bedevil the Paris Agreement for decades to come.

Policy relevance

The 2009 Copenhagen summit ushered in a more bottom-up system of international climate governance. Such systems typically depend on strong monitoring approaches to assess past performance and estimate future national contributions over time. This article shows why decision makers at multiple governance levels should pay serious attention to empirical data on the experiences and challenges that have emerged around monitoring in the EU, a self-proclaimed climate leader. The analysis highlights key political and administrative challenges that policy makers will likely encounter in implementing climate policy monitoring and ensuring transparency in the spirit of the Paris Agreement.     

Slovenia's climate policy efforts: CO2 tax and implementation of EU ETS

Slovenia is required to reduce its greenhouse gas emissions to an average of 8% below the base year 1986 in the period 2008–2012, due to the ratification of the Kyoto Protocol in 2002. It was the first of the transition countries to implement a CO₂ tax in 1997. At the beginning of 2005, Slovenia joined other EU Member States by implementing the Emissions Trading Scheme. In contrast with other new EU Member States, Slovenia will be a net buyer of allowances. Therefore future movements on the emissions market will play an important role in the compliance costs of achieving the Kyoto target. The main purpose of this article is to present the establishment and characteristics of the first national allocation plan (NAP1) and to describe the main elements of the second national allocation plan (NAP2) for Slovenia within the EU Emissions Trading Scheme, the expected movements on the emissions allowances market in Slovenia, the expected compliance cost of achieving the Kyoto target and to present the main characteristics and efficiency of the CO₂ tax in Slovenia.     

Interactions between climate and energy policies: the case of Spain

Emissions trading schemes (ETS) coexist with other environmental and energy policies, such as renewable energy promotion schemes. The potential synergies and conflicts between these policies are worth analysing. Spain is used as a case study to illustrate the theoretical, practical and quantitative interactions. The existence of national policies which affect CO₂ emissions and interact with the EU ETS may lead to conflicts, which could make it more difficult to reach the objectives of emissions reductions, local sustainability benefits, dynamic efficiency and moderate consumer costs. The coordination of efforts to mitigate these conflicts is difficult and may have limited effectiveness, since the instruments employed have multiple objectives and different territorial scopes. However, the coexistence of the EU ETS with other instruments can be justified if the latter can provide social benefits or tackle problems that the former cannot provide or solve (such as ‘local’ and ‘dynamic efficiency’ benefits). The results of an interaction between an ETS and renewable electricity promotion schemes depend on the type of RES-E (electricity from renewable energy sources) support scheme being used and on the specific design features of the instrument implemented.     

Carbon taxes: a review of experience and policy design considerations

State and local governments in the USA are evaluating a wide range of policies to reduce carbon emissions, including carbon taxes, which have existed internationally for nearly 20 years. In this article, existing carbon tax policies, both internationally and in the USA, are reviewed, and carbon policy design and effectiveness are analysed. Design considerations include which sectors to tax, where to set the tax rate, how to use tax revenues, what the impact will be on consumers, and how to ensure that emissions reduction goals are achieved. Emissions reductions that are due to carbon taxes can be difficult to measure, although some jurisdictions quantify reductions in overall emissions, others examine impacts that are due to programmes funded by carbon tax revenues.     

The global impacts of US climate policy: a model simulation using GCAM-TU and MAGICC

To assess the potential impacts of the US withdrawal from the Paris Agreement, this study applied GCAM-TU (an updated version of the Global Change Assessment Model) to simulate global and regional emission pathways of energy-related CO₂, which show that US emissions in 2100 would reduce to ?2.4?Gt, ?0.7?Gt and ?0.2?Gt under scenarios of RCP2.6, RCP3.7 and RCP4.5, respectively. Two unfavourable policy scenarios were designed, assuming a temporary delay and a complete stop for US mitigation actions after 2015. Simulations by the Model for the Assessment of Greenhouse-gas Induced Climate Change (MAGICC) indicate that the temperature increase by 2100 would rise by 0.081°C–0.161°C compared to the three original RCPs (Representative Concentration Pathways) if US emissions were kept at their 2015 levels until 2100. The probability of staying below 2°C would decrease by 6–9% even if the US resumes mitigation efforts for achieving its Nationally Determined Contribution (NDC) target after 2025. It is estimated by GCAM-TU that, without US participation, increased reduction efforts are required for the rest of the world, including developing countries, in order to achieve the 2°C goal, resulting in 18% higher global cumulative mitigation costs from 2015 to 2100.

Key policy insights

• President Trump’s climate policies, including planned withdrawal from the Paris Agreement, cast a shadow on international climate actions, and would lower the likelihood of achieving the 2°C target.

• To meet the 2°C target without the US means increased reduction efforts and mitigation costs for the rest of the world, and considerable economic burdens for major developing areas.

• Active state-, city- and enterprise-level powers should be supported to keep the emission reduction gap from further widening even with reduced mitigation efforts from the US federal government.

     

All adrift: aviation,shipping, and climate change policy

All sectors face decarbonization for a 2 °C temperature increase to be avoided. Nevertheless, meaningful policy measures that address rising CO₂ from international aviation and shipping remain woefully inadequate. Treated with a similar approach within the United Nations Framework Convention on Climate Change (UNFCCC), they are often debated as if facing comparable challenges, and even influence each others’ mitigation policies. Yet their strengths and weaknesses have important distinctions. This article sheds light on these differences so that they can be built upon to improve the quality of debate and ensuing policy development. The article quantifies ‘2 °C’ pathways for these sectors, highlighting the need for mitigation measures to be urgently accelerated. It reviews recent developments, drawing attention to one example where a change in aviation mitigation policy had a direct impact on measures to cut CO₂ from shipping. Finally, the article contrasts opportunities and barriers towards mitigation. The article concludes that there is a portfolio of opportunities for short- to medium-term decarbonization for shipping, but its complexity is its greatest barrier to change. In contrast, the more simply structured aviation sector is pinning too much hope on emissions trading to deliver CO₂ cuts in line with 2 °C. Instead, the solution remains controversial and unpopular – avoiding 2 °C requires demand management.

Policy relevance

The governance arrangements around the CO₂ produced by international aviation and shipping are different from other sectors because their emissions are released in international airspace and waters. Instead, through the Kyoto Protocol, the International Civil Aviation Authority (ICAO) and the International Maritime Organization (IMO) were charged with developing policies towards mitigating their emissions. Slow progress to date, coupled with strong connections with rapidly growing economies, has led to the CO₂ from international transport growing at a higher rate than the average rate from all other sectors. This article considers this rapid growth, and the potential for future CO₂ growth in the context of avoiding a 2 °C temperature rise above pre-industrial levels. It explores similarities and differences between these two sectors, highlighting that a reliance on global market-based measures to deliver required CO₂ cuts will likely leave both at odds with the overarching climate goal.     

Climate policy strength compared: China,the US,the EU,India, Russia,and Japan

The few systematic international comparisons of climate policy strength made so far have serious weaknesses, particularly those that assign arbitrary weightings to different policy instrument types in order to calculate an aggregate score for policy strength. This article avoids these problems by ranking the six biggest emitters by far – China, the US, the EU, India, Russia, and Japan – on a set of six key policy instruments that are individually potent and together representative of climate policy as a whole: carbon taxes, emissions trading, feed-in tariffs, renewable energy quotas, fossil fuel power plant bans, and vehicle emissions standards. The results cast strong doubt on any idea that there is a clear hierarchy on climate policy with Europe at the top: the EU does lead on a number of policies but so does Japan. China, the US, and India each lead on one area. Russia is inactive on all fronts. At the same time climate policy everywhere remains weak compared to what it could be.

Policy relevance

This study enables climate policy strength, defined as the extent to which the statutory provisions of climate policies are likely to restrict GHG emissions if implemented as intended, to be assessed and compared more realistically across space and time. As such its availability for the six biggest emitters, which together account for over 70% of global CO₂ emissions, should facilitate international negotiations (1) by giving participants a better idea of where major emitters stand relative to each other as far as climate policy stringency is concerned, and (2) by identifying areas of weakness that need action.     

The global carbon market-mechanism landscape: pre and post 2020 perspectives

With market-mechanisms likely to achieve emission reductions at lower cost than alternative approaches, there is a presumption that they will be embraced by those who are serious about achieving ambitious reductions. Two broad messages exist; there is already considerable activity and some ambition in many parts of the world – a fragmented but embryonic ‘global’ trading landscape is emerging – and there are efforts at UN level to provide a unifying framework for these bottom-up developments. The topography of interest and response varies considerably across groups of countries, and there have been delays in making progress on a unifying framework. This article analyses the current carbon market landscape in terms of market dynamics and market-mechanism developments whilst undertaking an examination of how climate change negotiations under the United Nations Framework Convention on Climate Change (UNFCCC) is shaping the future carbon market landscape. This work shows that the combination of existing, emerging, and potential carbon market-mechanisms can be regarded as an emerging pre-2020 fragmented ‘global’ carbon market landscape based on differing bottom-up market based approaches. One outcome of a 2015 Climate Agreement could be a post-2020 global carbon market which would include new domestic and international market initiatives such as the Framework for Various Approaches and New Market Mechanism, together with reformed Kyoto mechanisms.

Policy relevance

With the 2015 Agreement under the United Nations Framework Convention on Climate Change (UNFCCC) expected to see Parties commit to ambitious mitigation commitments, post-2020 could see significant Party (& industry) investment in market-mechanisms and associated emissions units in an effort to achieve some of the abatement cost minimization offered by market approaches. This article is written for those who have an interest in understanding what is happening – and what is not happening – as regards the emergence of market-related approaches to GHG mitigation globally in the run up to the 21st Conference of the Parties (COP) of the UNFCCC which meets in Paris in December 2015, and what could be the shape of things to come post-2020.     

Time to market in the CDM: variation over project characteristics and time

Not only is the carbon market inundated with Certified Emissions Reductions (CERs) issued by successful projects, it is also littered with failed projects, that is, projects that either fail to be registered under the Clean Development Mechanism (CDM) or projects that have been successfully registered but fail to issue CERs. By relying on a novel application of survival analysis in the context of the CDM, this article shows that half of all projects that start the Global Stakeholder Process fail to issue CERs, while the other half have a median time to market of four years. Furthermore, it is shown that some of the best projects, in terms of being additional, are those that are least likely to make it to market, whereas some of the worst projects, in terms of not being additional, are the ones that are most likely to make it to market. This presents a fundamental challenge for the CDM and future offset schemes that rely on the same design as the CDM. In contrast with previous studies, it is shown that, when project characteristics are controlled for, not all durations measured along the CDM project cycle have increased over time.

Policy relevance

This article develops a novel method for analysing durations measured along the CDM project cycle that avoids the biases of previous studies, and corrects for some misconceptions of what the delays faced by CDM projects are and how these delays have changed over time. Developing an understanding of the delays is important in order not to draw the wrong lessons from the CDM experience. As the leading example of an offset scheme, both in terms of geographical scope and sectoral coverage, and some would say institutional complexity, the CDM serves as a benchmark and reference for all future offset schemes, among others, for the New Market Mechanisms (NMMs) and the Chinese domestic offset programme. While the NMMs are still very much in development, China has announced that it will rely on the methodologies and procedures developed under the CDM for generating offsets for their regional carbon trading schemes.