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Emissions Trading Hybrids: The Case of the EU ETS

Woerdman Edwin () and Nentjes Andries ()
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Nentjes Andries: Faculty of Law, Department of Business Law, European Law and Tax Law, University of Groningen, PO Box 716, Groningen9700 AS, the Netherlands

Review of Law & Economics, 2019, vol. 15, issue 1, 32

Abstract: We argue that the European Union Emissions Trading System (EU ETS) has evolved into a hybrid of two design variants, allowance trading (cap-and-trade) and credit trading (performance standard rate trading), with an added feature of industry support to minimize carbon leakage. In particular the current rules tying free allowances to production capacity expansion, plant closure and capacity use have transformed the efficient cap-and-trade program that stood at the origins of the EU ETS into a system that even surpasses credit trading in paying hidden product subsidies to firms. This combination of rules encourages an inefficiently high level of investment in production capacity and an inefficiently high output in industries exposed to international competition. The result is a sub-optimal EU Emissions Trading ‘Hybrid’ (which we therefore label as ‘EU ETH’).

Keywords: European Union Emissions Trading System; economic efficiency; cap-and-trade; performance standard rate trading; carbon leakage (search for similar items in EconPapers)
JEL-codes: D21 D62 K32 Q48 Q54 (search for similar items in EconPapers)
Date: 2019
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