In this undergraduate research paper, the author describes how the European Union Emissions Trading Scheme (EU ETS) works and shows that the "cap and trade" system leads to inefficient outcomes due to over-allocation and price volatility.
Table of Contents
I. Introduction
II. How the EU ETS works
III. Success of the EU ETS
IV. Remaining Issues
V. Why the EU ETS is not a global remedy
VI. Conclusion
Objectives & Topics
The paper examines the functionality, economic efficiency, and future prospects of the European Union Emissions Trading Scheme (EU ETS) as a primary policy instrument for climate change mitigation.
- Mechanism and "cap and trade" system functionality
- Evaluation of emission reduction success and targets
- Analysis of economic challenges such as overallocation and windfall profits
- Impact of VAT fraud and cybersecurity threats on system efficiency
- Global applicability and limitations of the EU model
Excerpt from the book
II. How the EU ETS works
The EU ETS uses the “cap and trade” system:
Each participant is allocated a certain amount of allowances. One allowance gives the owner the right to emit one tonne of carbon dioxide.
The cap limits the number of allowances and therefore the total amount of greenhouse gases emitted by all the power plants and factories covered by the system. If a participant does not buy enough allowances to cover his emissions, he will be fined heavily. However, the members are free to trade the allowances within the EU ETS. The desired effect of reducing greenhouse gas emission is reached by lowering the cap over time.
Economically speaking, the EU introduced a scarce good (allowances) which is a non-substitutable factor of production of certain economic agents (participants in the EU ETS). By lowering the limit gradually, the “cap and trade” system generates an incentive to reduce greenhouse gas emissions, which can be achieved by introducing new technologies, producing more efficiently or reducing output.
Participants choosing not to reduce emissions are punished by the system because they would have to acquire allowances from emission-reducing members as the cap is being lowered over time.
Summary of Chapters
I. Introduction: This chapter introduces the context of global warming and the implementation of the EU ETS as a large-scale regulatory response by the European Union.
II. How the EU ETS works: This section explains the "cap and trade" mechanism, the allocation of allowances, and the transition from free allocation to an auctioning-based system.
III. Success of the EU ETS: This chapter analyzes the effectiveness of the system in meeting reduction targets and evaluates its economic efficiency based on cost-benefit assessments.
IV. Remaining Issues: This section addresses systemic challenges, specifically overallocation, price volatility, windfall profits, VAT fraud, and cybersecurity concerns.
V. Why the EU ETS is not a global remedy: This chapter discusses the limitations of the model, focusing on the Equimarginal Principle and the difficulties of scaling the system globally.
VI. Conclusion: This chapter summarizes the findings, advocating for the continued use of the EU ETS while suggesting a decentralized approach for international implementation.
Keywords
EU ETS, greenhouse gas emissions, cap and trade, climate change, carbon dioxide, economic efficiency, overallocation, windfall profits, VAT fraud, cybersecurity, emission allowances, global warming, policy instrument, Kyoto Protocol, emission market
Frequently Asked Questions
What is the core focus of this publication?
The publication focuses on the functionality, efficiency, and future implications of the European Union Emissions Trading Scheme (EU ETS) in addressing climate change.
What are the primary thematic areas covered?
The main themes include the mechanical operation of the "cap and trade" system, an evaluation of historical emission reduction performance, economic challenges like price volatility, and the suitability of the model for global adoption.
What is the central research question?
The paper investigates whether the EU ETS effectively meets its environmental goals and whether it represents an economically efficient model for reducing greenhouse gas emissions.
Which methodology is applied?
The author employs a comparative and evaluative analysis of existing economic data, European Commission reports, and academic literature regarding environmental economics.
What aspects of the system are discussed in the main body?
The main body covers the "cap and trade" mechanics, the success of the system relative to GDP growth, systemic risks like VAT fraud and hacking, and the economic principles governing emission control.
Which keywords define this work?
Key terms include EU ETS, greenhouse gas emissions, cap and trade, economic efficiency, and emission allowances.
How does the author view the problem of "windfall profits"?
The author argues that these profits result from free allowance allocations and proposes that auctioning every single allowance is necessary to prevent income transfers from citizens to companies.
What is the author's stance on the global expansion of the EU ETS?
The author is skeptical about a single global market due to economic heterogeneity and legal barriers, suggesting that regional emission markets are a more viable path forward.
- Quote paper
- Tobias Kohler (Author), 2013, Functionality, Efficiency and Future of the EU ETS, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/269286
