1. The EU's Emission's Trading Scheme: Past Choices, Future Options
Michael Mehling
Ecologic Institute
Climate Change Policy:
Lessons from the European Experience
Rutgers University
26 March 2010

2. Europe - Reluctant Champion of Emissions Trading?

3. Europe and Emissions Trading: From Foreign Concept to “Crown Jewel” of EU Climate Policy
Strong focus on fiscal options – a combined energy and carbon tax – as central mitigation instrument in the EU throughout the early and mid-1990s
Open EU opposition to market-based mechanisms at UNFCCC COP 3 in Kyoto, Japan, in 1997, largely out of concern over “hot air”, but also arguably due to the different regulatory approaches prevalent in EU environmental policy
Yet by 1998 Commission Communication endorses emissions trading: “extreme about-face” that occurred virtually “overnight” as an “an ultra- quick political ‘pregnancy’” and “grand policy experiment”?

4. Warming Up to Emissions Trading: Influential Factors
Inability to achieve the unanimity required for fiscal measures in the Council
Personnel changes at the European Commission: knowledge transfer from the US with its positive experiences
Desire to build capacity on market mechanisms now that these were mandated by the Kyoto Protocol
Strong support from the private sector as more flexible and cost- efficient instrument; pilot trading systems within large companies
Synergies with the evolving licensing regime under the IPPC Directive

5. Allocation Method: Responding to Political Pressures
Commission Green Paper (COM(2000)87, 8 March 2000): Auctioning is the “technically preferable option” and would ensure an “equal and transparent allocation for all participants”, “meet the requirements of the 'polluter pays' principle”, provide a source of revenues to maintain the overall revenue effect neutral or promote mitigation efforts, and avoid the need for a difficult and sensitive determination of allowance shares granted to different sectors, thereby eliminating the risk of a breach of state aid and competition rules.
Amended Proposal for ETS Directive (COM(2002)680, 27 Nov. 2002): Commission “opposed to any auctioning in the first period and wishes to take account of experience before deciding on the method of allocation for the second.”
Sounds familiar?

6. Looking into the Future: EU ETS - Nucleus of a Global Carbon Market?

7. European Emissions Trading: Nucleus of a Global Carbon Market?
Communication of the European Commission International Climate Policy Post-Copenhagen: Acting Now to Reinvigorate Global Action on Climate Change, COM(2010)86 final of 9 March 2010:
“An international carbon market should be built by linking compatible domestic cap-and-trade systems. The goal is to develop an OECD-wide market by 2015 and an even broader market by 2020”.

8. Legal Basis: The Mandate Post-2012
Article 25 (1) of Directive 2009/29/EC (EU ETS Directive)
“Agreements may be made to provide for the recognition of allowances between the Community scheme and compatible mandatory greenhouse gas emissions trading systems with absolute emissions caps established in any other country or in sub-federal or regional entities.”

9. Europe’s Vision: Pathways to a Global Carbon Market
Source: Lazarowicz, 2009

10. Mark Lazarowicz, Special Representative on Carbon Trading, United Kingdom
“A dual-level system of global carbon trading could reduce the costs of emissions reductions by up to 70%. These efficiencies could potentially allow the world to reduce emissions by an additional 40-50% at the same cost while providing substantial financial flows to the developing world to support the move to a low carbon economy with sustainable growth.”

11. Compatibility: Necessary to Avoid a Number of Risks …
Potential Drawbacks of Linking
“Contagious” design features of each system will be perpetuated across linked markets, risking an increase of overall emissions
Systems with rising prices may see increased compliance costs and higher energy prices: competitiveness and distributional concerns
Depending on the mechanism used to link, states may cede sovereignty to effect changes on certain design features of their trading systems

12. Elements of Compatibility – A Barrier Analysis
Compatibility of linked systems is essential price caps, borrowing, absolute/relative caps, ex-post adjustments, continuity
Compatibility of linked systems is desirable enforcement, stringency, banking, commitment periods, offset crediting
Differences between systems are possible compliance periods, monitoring and verification standards, leakage control, allocation methods, new entrants and closures, sectoral coverage, registries
(Tuerk/Mehling/Flachsland/Sterk, 2009)

13. Ensuring Compatibility over Time
Domestic or regional systems can be changed unilaterally
Incentive dynamics change under a link: systems can become net sellers by reducing their environmental stringency
Mechanisms to sustain compatibility
a process for agreeing on or notifying revisions to the system
mechanisms to ensure environmental effectiveness of each system
a procedure for terminating or withdrawing from the link
(Source: Mehling/Haites, 2009)

14. Potential Governance Challenges
Source: Mehling, 2009

15. Sectoral Mechanisms: Using the EU ETS as Diplomatic Leverage?
Communication COM(2010)86 final of 9 March 2010:
“Over the last years negotiations on market-based mechanisms have been met with severe criticism from a number of developing countries, putting into question whether this can be done under the auspices of the UNFCCC The EU should therefore use the provisions of the current EU ETS legislation to incentivise the development of sectoral carbon market mechanisms and to promote the reform of the CDM.”

16. References
European Commission (2010): International Climate Policy Post-Copenhagen: Acting Now to Reinvigorate Global Action on Climate Change, COM(2010)86 final of 9 March 2010.
European Union (2009): Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community.
Lazarowicz, Mark (2009): Global Carbon Trading: a Framework for Reducing Emissions, Office of Climate Change, London, U.K., available at: ns.aspx.
Mehling, Michael (2009): Global Carbon Market Institutions: An Assessment of Governance Challenges and Functions in the Carbon Market, Background Paper for the Office of Climate Change, London, U.K., available at: ns.aspx.
Mehling, Michael, and Erik Haites (2009): “Mechanisms for Linking Emissions Trading Schemes.” 9 Climate Policy:
Tuerk, Andreas, Michael Mehling, Christian Flachsland, and Wolfgang Sterk (2009): “Linking Carbon Markets: Concepts, Case Studies and Pathways.” 9 Climate Policy (2009):

17. Thank You!
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