Responsible Investment

EU Cap and Trade: an unfulfilled promise?

November 15, 2011
Image "Shade" by Emiradd (CC BY-NC-ND)

The purpose of EU ETS is to reduce carbon dioxide emissions in a cost-effective way, with the ultimate aim of combating global climate change. In the Web publication 'Public interests in the implementation of the EU ETS in the Netherlands: stakeholder perspectives.' the WRR set out to answer the question how the introduction of the EU ETS in the Netherlands motivates stakeholders to serve public interests, such as reduction of carbon dioxide emissions. The publication concludes Cap and Trade effectiveness in terms of CO2  emissions reduction is still largely an unfulfilled promise.

The system of Cap and Trade places a limit (a ‘cap’) on emissions by factories, power plants and installations. Within this cap, companies receive permits for emissions. Each permit allows the owner to emit a certain amount of pollutant. Companies emitting less than the permits they own can sell their leftover permits to businesses who struggle to keep their emissions within the limits of permits they own. The number of permits is limited, ensuring they have value.

Market participants more proactive than expected

The researchers find all participants in the market seem to have committed to the EU ETS , and the carbon market has turned out to be bigger and more dynamic than initially foreseen. The success of the new scheme also caused implementation problems, the report finds. Government officials didn’t expect the current level of (future) market trading, passing on costs, accounting matters and lobbying activities from market participants. “Since legislation takes time to establish, government capacity has been limited and public interests are not as clear cut as corporate interests, governments seem to have lagged behind market developments,” the WRR states. Policy makers who wanted to establish a new market apparently got more than they anticipated.

Cap and Trade superior to taxing

One of the most striking observations from the empirical findings, according to the authors, is that all respondents regard Cap and Trade as the superior mechanism for achieving emission reduction goals: “Contrary to the academic discussion, where the comparison between taxes and Cap and Trade is still ongoing and the position of taxes appears to be strong, respondents considered the EU ETS to be the superior system."

Higher and stable prices

The authors describe that some interviewees expect the government to go beyond the functioning of the market and to develop a vision on the outcome of the market: “Since they consider the EU ETS to be the driver for abatement and innovation, carbon prices should be ‘meaningful’, which is certainly not the situation at current spot prices, and still too weak at future prices.”  Other interviewees expect the EU ETS authorities to provide minimum prices or withdraw allowances from the market in the event of over allocation.

Questions remain about reducing carbon emissions

The WRR doesn’t answer the question whether the EU ETS has accelerated the development and diffusion of new clean technologies. Questions remain whether the goal of reducing carbon emissions has been achieved yet: “Those who focus on this goal conclude that carbon markets have not yet done anything to promote emission abatement and require adaptations in the market to improve actual outcomes.”  So an active market has been established, but the goal of reducing CO2 emissions remains elusive.

More on market, state and society

This study was carried out as part of the preparation of the WRR report on market, state and society which will be published in January 2012 and which explores the question of how the government can protect both social and public interests in a market environment. More information on the project can be found on the website of the WRR.

Reference and citing

Public interests in the implementation of the EU ETS in the Netherlands: stakeholder perspectives. Frank van der Salm, Erik Stam, Cor Marijs and Gerard de Vries.  Web publication no. 61, Wetenschappelijke Raad voor het Regeringsbeleid.

This article may be reproduced according to our terms of use with attribution (and link, if online) to http://www.tias.edu. To be cited as: “EU Cap and Trade: an unfulfilled promise?”, Frank van der Salm, Erik Stam, Cor Marijs and Gerard de Vries, www.tias.edu, November 15, 2011.

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Public interests in the implementation of the EU ETS in the Netherlands stakeholder perspectives
WRR Web publication

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