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BENVGBE8: MSc EPEE Dissertation
The European Union Emissions Trading System: Lessons Learned from A Focused Analysis of Global
CO2 Cap-and-Trade Programmes
by
Christopher R. Glotfelter
1st September 2015
Word Count: 10,135
Paper submitted in part fulfillment of theDegree of Master of Economics and Policy of Energy and the Environment
Energy InstituteUniversity College London
Table of ContentsAbstract...................................................................................................................................... 3
I. Introduction........................................................................................................................... 3
II. Research Method and Methodology............................................................................6A. Research Strategy............................................................................................................................7B. Data Collection................................................................................................................................. 7C. Framework for Data Analysis........................................................................................................8
III. European Union Emissions Trading System............................................................8A. Brief Overview.................................................................................................................................. 8B. Phase I (2005-2007)..................................................................................................................... 10C. Phase II (2008-2012)....................................................................................................................11D. Phase III (2013-2020)..................................................................................................................13D. Phase IV (2021-2030).................................................................................................................. 16
IV. U.S. Regional Greenhouse Gas Initiative................................................................18A. Brief Overview............................................................................................................................... 18B. RGGI, Inc. v. the European Commission – An Operational Analysis......................................19C. Compliance Mechanisms..............................................................................................................25D. Mandated Programme Reviews.................................................................................................27
V. Chinese Pilot Programmes........................................................................................... 28A. Brief Overview............................................................................................................................... 28B. Insights for the EU ETS.................................................................................................................29
VI. Conclusion and Recommendations..........................................................................32
Bibliography........................................................................................................................... 35
2
The European Union Emissions Trading System:
Lessons Learned from A Focused Analysis of Global CO2
Cap-and-Trade Programmes
AbstractThis paper examines the EU ETS from legal and regulatory viewpoints focusing on
compliance and oversight. After an initial focus on the EU ETS, analysis turns to
counterpart systems in the United States and China in order to garner differentiated
insight into effective mechanisms for structural reform. Pertinent mechanisms are
theoretically applied to the EU ETS and the resulting impacts outlined. The
determination is made that the European Commission’s reactivity as it pertains to
compliance and oversight is insufficient to allow for a thriving carbon market decades
into the future.
I. Introduction
Successful sulfur dioxide and nitrous oxide emissions trading systems in the United
States created the basis for and, to an extent, the initial structure of the European
Union Emissions Trading System (EU ETS)(European Commission, 2000; Kruger
and Egenhofer, 2006). However, EU ETS failures in the first two phases have led
investors to question the long-term certainty of the system, as well as its ability to
provide sufficient flexibility to allow for continuous evolution (Wråke et al., 2012;
Laing et al., 2013; Martin et al., 2014). This has led to an acknowledgement of the
need for an overhaul of the system (Moore and Newey, 2013). While economic
mechanisms have been at the forefront of these discussions, much less attention has
been focused on the legal and regulatory underpinnings (Directive 2004/101/EC,
2004; Kruger, Oates & Pizer, 2007; European Commission, 2012; Bogojevic, 2013).
According to Freestone and Streck (2009), it is important to assess the legal
underpinnings of an ETS as “carbon markets are sophisticated entities, borne out of
3
a political decision to constrain certain forms of polluting behaviour; an artifice by
nature, thus, their very existence is contingent on the adoption of a of defined
objectives, procedures and substantive rules and procedures” (p.111). The legal
framework within which an ETS is constructed and subsequently operates is the
foundation of the system. Without an adequate foundation on which to build,
subsequent policy and economic considerations are rendered moot. It is therefore
imperative that the legal framework is constantly monitored for its adequacy to
support the overarching goals of the system.
Legal and regulatory framework failures of the EU ETS stem from two main
categories: compliance mechanisms and regulatory oversight. This has been of
particular note lately in the media (Voutsina, 2015). While these two areas have
been discussed in literature and have slightly adapted to changed circumstances
throughout the first two phases of the EU ETS, the European Commission (EC) has
taken a by-the-book, traditional approach to adaptation that may be inadequate in
dealing with such a modern, sophisticated system. That is, we must dispatch with
the idea that even as the EU ETS is relatively simple given its size and scope, it is still
comprised of complex, multi-level governance structures where there cannot be
simplistic, generic portrayals of regulatory mechanisms nor can its regulation be
singularly left to either the state or the market (Bogojevic, 2013). However, in our
analysis, we must be equally cognisant that ETSs are not “propagated in identical
sterile laboratories” that would lead to the notion that success in one jurisdiction
would necessitate success in another (ibid. at 10). Kruger, Oates and Pizer (2007)
make the case for initially centering emissions trading analyses around the EU ETS
due to its perceived ability to link together programmes in other countries and
regions of the world (p.112). While academics and policy officials generally agree
with this approach, there remains a lack of clarity around framework mechanisms
that would allow for an amalgamation of programmes and thus allow for cross-
fertilisation of the EU ETS via other systems. Scholars have intensely focused time
and brainpower on economic mechanisms for attaining compliance (e.g. emissions
cap, auctioning, banking, trigger prices and borrowing), but have largely left
4
untouched the legal and regulatory underpinnings (e.g. oversight, monitoring,
reporting, verification and enforcement) in terms of optimising flexibility and
harmonisation (ibid.; Mizrach, 2012; Martin et al., 2014). Traditional thinking will
not be enough to tackle the issues that arise within the EU ETS; it therefore becomes
imperative to analyse unique carbon emissions trading systems where new
solutions are being tested and proved. The age of the long honeymoon in legal
scholarship for pollution trading schemes therefore must come to an end
(Heinzerling, 2003).
In looking at a few choice carbon emissions trading systems: the EU ETS is a
mandatory, regional scheme made up of 28 member states and three EEA-EFTA
countries; the US Regional Greenhouse Gas Initiative (US RGGI) is a non-federally
mandated, regional scheme made up of nine northeastern and mid-Atlantic states;
and the Chinese pilot programmes (Chinese Programmes) are in the learning phase
in seven regions of a country with a distinctly bifurcated political oversight
structure and sometimes unique approach to compliance. In order to provide the
most meaningful analysis on how to improve global emissions trading systems and
proactively deal with any issues that may arise, always keeping an eye toward the
potential for linking systems, the EU ETS will be used as a starting point with the US
RGGI and Chinese Programmes providing additional insight.
To this end, I will analyse the proxies of compliance and enforcement mechanisms,
as well as centralisation and harmonisation of regulatory decision-making, for their
ability to be sufficiently rigid to ensure investor confidence while still maintaining
enough flexibility to amalgamate diverse national-level interests. These are
particularly important as shown by Freestone and Streck (2009), where they stated
that “where legislation defines [a topic] differently, but where the trading systems
are linked, such as in the EU ETS, difference in treatment can make one submarket
of the overall system more attractive than others” leading to market distortion, a
fundamental flaw in a cap-and-trade system (p.36). Shedding light on these issues is
important to elevate the EU ETS to such a level where it gains preferential status
5
amongst cap-and-trade programmes that others can emulate, rather than newly
developed ETSs having to start from scratch and inefficiently deal with problems
already tackled by the EU; the goal is to prevent duplicative efforts in order to allow
for quick and efficient ETS implementation to combat the effects of climate change.
Therefore, this paper will answer the following: What legal and regulatory aspects
of emerging carbon emission trading schemes can be used to enhance the effectiveness
of the EU ETS?
This paper is structured as follows: Section II provides the methodology through
which my analysis is made, Section III outlines the EU ETS through its first three
phases and discussions for the fourth phase, Section IV provides insights from the
US RGGI model, Section V takes novel insights from the Chinese Programmes and
Section VI concludes.
II. Research Method and Methodology
Beginning with the EU ETS and subsequently analysing the US RGGI and Chinese
Programmes, discernments will be derived from emerging ETS frameworks provide
restructuring insights for the EU ETS. In order to adequately develop these insights,
however, a methodology must be selected which is deductive (to account for the
qualitative nature of the analysis), mono-method (to account for time and resource
constraints) and cross-sectional (in order to obtain un-manipulated data at a given
time on the different trading schemes within my sample).
Rapid evidence assessment (REA) allows for a comprehensive and exhaustive
overview of pertinent research and provides sufficient time for a thoughtful
synthesis of evidence (Civilservice.gov.uk, 2015). Typically taking place over the
course of two to six months, REA allows the researcher to be discerning in their
source acquisition and analysis (ibid.). Further, REA allows for the sifting out of
studies or publishing of poor quality, those that may be generally applicable but do
6
not provide unique analysis or those that are subject to unacceptable levels of bias
(Booth et al., n.d.). To that end, as shown by Butler et al. (2005), REAs are
susceptible to selection and publication biases. During my research, it was
especially important to be cognisant of publication bias, as governmental and state-
run organisations that publish guidance and review documents may have a higher-
than-normal probability of favoring governmental action over inaction. However, as
literature is limited in areas such as reviews of the effectiveness of the Chinese
Programmes, as they are still in the pilot phase, publication bias was controlled to
the extent possible as these resources were utilised.
A. Research Strategy
My population of interest is current and prospective emissions trading schemes in
the global arena. The specific sample was derived from a non-probability sampling
method where qualitative analysis was performed through studying the schemes,
making sense of their applications and resultant effects and analysing the potential
correlational and causational effects (Denzin and Lincoln, 1994). This research is
further based on quota sampling where one ETS has been established for a decade
(EU ETS), one is still in its youth period and voluntary from a federal standpoint (US
RGGI) and one is in the midst of its pilot phase (Chinese Programmes), allowing each
to provide critical feedback that is not only delineated by locale but also by
structural components and ability to build upon others’ inadequacies. While quota
sampling is not random, and therefore triggers criticism as to its application to a
larger population, the selection of three vastly differentiated groups from a limited
pool decreases the selection bias effect (Biggam, 2008).
B. Data Collection
Information was obtained via secondary data sets beginning with the ETS
frameworks and followed by published scholarly and governmental works that
7
critically analysed the proxy variables. Both secondary data sets are freely available
in the public domain via online search databases. The organisational legal
documents were obtained through the official websites of each ETS and scholarly
works through searches in Scopus and UCL Metalib, and supplemented by print
resources from UCL’s libraries, as well as referred sources from my dissertation
supervisor, Chiara Armeni. As limited literature exists on this precise topic, this
method of resource exploration and retrieval provided the best means of eliciting an
exhaustive list of sources.
C. Framework for Data Analysis
Each ETS was analysed in turn, beginning with the EU ETS. Once the frameworks
were reviewed and the black letter law as it applies to the proxies outlined, a
literature review of the pros and cons of my proxy variables in the given scenario
allowed for a more complex understanding of the issues. Once this foundational
knowledge was gained, the regulatory requirements of the US RGGI were examined
with a literature reviewing providing additional context, allowing for delineation
between schemes. Finally, the same process was undertaken for the Chinese
Programmes and insights derived were used to improve the EU ETS, creating the
basis for restructuring the system with an eye toward using such as a global
emission-trading framework for emerging programmes.
III. European Union Emissions Trading System
A. Brief Overview
The EU ETS was the first and still is the largest cap-and-trade system for carbon in
the world. Comprised of twenty-eight EU and three EEA-EFTA countries, it provides
a glimpse into a large scale, cross-border ETS: both the successes and failures of
such a prolific system. Necessarily, a system of such size and complexity requires
8
continuous attention throughout its evolution in order to ensure that its
developmental pace is adequately coupled with enough flexibility to address risks as
they inevitably arise. Currently in its third phase, the EU ETS has already seen
numerous strategic corrections in its structural design to address problems during
the first two phases. A discussion of each of each phase, the issues arising during
them, and the corrections made for the current phase will help provide background
and context for later discussion into remaining issues and restructuring advice.
As a primer to allow for deeper understanding of system minutia, it is important to
understand how an emissions cap-and-trade system works. While not exhaustive,
the following provides a summary glimpse into the operational mechanisms of a
cap-and-trade programme. The central mechanism is the setting of a cap on
emissions, a total amount of CO2 (or its equivalent) that may be emitted within any
jurisdictional boundary. Once a cap is set, allowances are allocated to the regulated
entities (as determined by industry, installation type and size) by free allocation,
auctioning, or a combination thereof. Monitoring, reporting and verification (MRV)
infrastructure is then put in place so as to maintain the validity of the market while
allowing both the regulators and regulated entities the ability to track compliance.
Subsequent to the end of each compliance period, during the true-up window, each
regulated entity must surrender allowances equal to their emissions for the
requisite period. If they have an overabundance of allowances, any excess may be
banked for the following compliance period (if applicable) or sold on the open
market; if their allowances fall short of their emissions, they are forced to transact in
the market for additional allowances to meet their compliance requirements. This
form of emissions control provides incentives for regulated entities to reduce their
emissions and invest in cleaner technology so long as the cost of such an investment
is less than the cost would be to purchase additional allowances in the open market,
and it allows regulated entities the choice of how to comply, providing flexibility
that is not available under traditional command-and-control regulation. Therefore,
with this general understanding of how cap-and-trade systems function, I now turn
9
to a discussion of the EU ETS and the changes it has already seen during its first
three phases.
B. Phase I (2005-2007)
Coined “learning by doing”, Phase I allowed the European Commission (EC) and
national governments to implement the system and make necessary corrections in
order to prepare for the binding Kyoto requirements of Phase II (Ec.europa.eu,
2015b). However, regulators quickly learned how little pertinent information they
possessed and how that lack of information created ripples that eventually crippled
the allowance market by 2007 (ibid.). Without verified emissions data, a meaningful
cap on emissions could not be set; without a reliable emissions cap, allocations had
to be made based on the regulator’s best guess; because allocations were made
based on rules of thumb and theoretical models (as well as grandfathering these
allocations free of charge), regulated entities received a surplus of allocations; and
because these entities each had a surplus of allocations, the internal market failed
and the price of such allocations dropped to nearly zero – a glut of supply with no
corresponding demand. Regulators learned the hard way how crucial it was to have
significant compliance measures in place for MRV. According to Kruger and
Egenhofer (2006), achieving “high levels of compliance hinges on robust and
effective strategies for MRV, where confidence in the system relies on timely and
accurate information on emissions levels, allowance holdings and trades” (p.2).
Since no verified emissions data existed at the commencement of Phase I, the EU
ETS provided a solution dedicated to ensuring that this innate flaw did not plague
future phases. Directive 2003/87/EC of the European Parliament and the Council
(the 2003 ETS Directive) provided for the implementation of MRV infrastructure,
namely the Community Independent Transaction Log (CITL). While the CITL was a
EU-level, centralised database, it was merely a shell into which national-level
registries linked. That is to say it was simply a façade that masked unique national
10
registries set up and implemented by individual member states behind EU
legitimacy. Though these national databases were linked to each other and,
eventually, the CITL, there was no requirement of uniformity and a member states’
registry could be as rudimentary or complex as they wished, leading to the
possibility of syncing issues. Still, data flooded into the CITL during Phase I though
it quickly became evident that a spider web of national-level data amalgamated into
a central system was not the most prudent, efficient or reliable means by which to
measure progress. Further, the EC acting as merely a conduit through which
information was disseminated was not a practical means of operationalising MRV
procedures, or the EU ETS in a broader sense. This realisation that the EU must take
a more hands-on approach would begin to manifest itself throughout other aspects
of the system, though regulators woud still remain cognisant of keeping compliance
costs low so as not to heavily burden regulated entities.
However, even with its shortcomings, Phase I was “highly effective in making
boardrooms aware of carbon risks and opportunities and stimulating the search for
abatement opportunities” (Stewart, Kingsbury and Rudyk, 2009, p.222). Therefore,
this momentum had to continue and be bolstered through additional efforts to
streamline and increase the effectiveness of the EU ETS operationalisation.
C. Phase II (2008-2012)
Phase II brought with it the increased burden of Kyoto Protocol compliance. In
order for binding targets to be achieved, the kinks worked out in Phase I would need
to be assured not to arise again in the same or different form. Focused changes
were made in direct response to Phase I inadequacies. Of importance to note here,
changes included: a non-compliance penalty set at 250% that of the first phase, an
adjusted emissions cap which was 6.5% lower based on Phase I verified emissions
data (though allowance allocation was still mainly free of charge and not via
11
auctioning), and transition from the CITL to the European Union Transaction Log
(EUTL)(Ec.europa.eu, 2015d).
Though issues of non-compliance were controlled for in the 2003 ETS Directive,
practical adaptability required continuous response to market fluctuations and
natural development of the system. As a responsive regulator, the EC enabled a
proactive measure to deter noncompliance through a penalty rate over ten times the
average rate of an allowance. Proactivity, however, must not just be focused on one-
off singular aspects of a system, but also on the broader picture and on knock-on
effects of both action and inaction. As will be discussed later in this paper, deterring
noncompliance is not the only means by which goals can be achieved; incentivising
compliance also has its validity.
Allocations becoming (essentially) valueless in Phase I was a misstep that could not
be repeated within the system if it was to succeed. An oversupply of allowances
leading them to decrease in value detracts from a liquid market and is
counterproductive to a system in which flexible compliance is one of the leading
attractants for its credibility in being able to effectively and efficiently achieve its
stated goals. Data gathered through the MRV process during Phase I allowed the
setting of a more realistic emissions cap (and resulting national allowance allocation
plans). The reduction in the cap by 650 basis points was a strong signal to regulated
entities and investors alike that the system could meaningfully adapt by leaps and
bounds based on control mechanisms put in place throughout the phases. Though
some may question the need for such drastic changes, recalibrations such as these
can be seen as relatively normal at the beginning of newly implemented and
extremely complex systems as these frameworks are never flawlessly implemented
in the first instance.1
1 See U.S. Department of Energy’s, Energy Information Administration’s Annual Outlook for U.S. Electric Power 1991, regarding windfall profits from allowance allocations to standby or retired plants in the U.S. Acid Rain Program.
12
The EC commenced the system with a very hands-off approach where national
governments were given much leeway in order to determine how to best implement
each part in their jurisdiction: national allocation plans determined how allowances
were distributed, national registries fed into the CITL, exemptions were determined
on a national level. While the EC set overall targets and frameworks, there was
growing pressure to limit the ability of national governments to unilaterally
implement measures. The second phase, however, brought with it the notion of a
more harmonised and centralised approach, especially with regard to MRV. There
was a movement away from the CITL that allowed national registries to feed into a
supranational shell and toward the new European Union Transaction Log (EUTL).
The EUTL is of particular importance in this paper’s analysis, as it not only
represents a step toward increased harmonisation at the EU-level, but also a
compliance mechanism that now has closer independent regulatory oversight at the
supranational level. This single registry replaced national registries following the
ETS Directive revision in 2009. The EUTL “automatically checks, records and
authorizes all transactions” that take place between registry accounts (Ec.europa.eu,
2015f). Therefore, the EC itself can verify that all transactions are compliant with
set rules and regulations and there is less of a need for independent verification
based on state-level reporting. Further, the EUTL provides a compliance code (in
letter form: A, B, C, D, E or X) allowing public individuals the knowledge of whether
or not an installation is in compliance with its ETS requirements. This form of
“name shaming”, while minimal and somewhat subtle, is another step toward
improving compliance as it can negatively affect a company’s reputation in the case
of noncompliance.
D. Phase III (2013-2020)
In response to issues from the first two phases, and further due to investor
sentiment for increased flexibility as well as long-term predictability, the EC
amended the 2003 ETS Directive which brought about numerous changes to the
13
operationalisation of the EU ETS (Directive 2009/29/EC). Changes included a single
EU-wide emissions cap, further allocation of allowances via auctioning
(progressively increasing annually), harmonised allocation rules, coverage of
additional sectors and gases, backloading of allowances, a New Entrants Reserve
and a Market Stability Reserve (MSR, which was pushed up in timeframe as it was
originally sought to begin in Phase IV)(Ec.europa.eu, 2015d).
The EC determined the following to be more prudent items to deal with at the
supranational level: allocations, the emissions cap and market safeguards. National
level allocation and caps were done away with in favour of a single, EU-wide cap and
allocation rules. The EU has also signaled to investors that there will be increased
regulatory certainty via a set annual cap reduction of 1.74% per annum that will
continue post-Phase III, though a proposal has already been made to increase the
reduction to 2.2% per annum during this phase in order to drive up allowance
prices (Drozdiak, 2015). Further, the EC has seen fit to continue the trend of
allowance auctioning over free allocation. While 50% of allowances were auctioned
at the beginning of the phase, that number will rise to 70% by 2020 and 100% by
2027 (Ec.europa.eu, 2015a).
In a signal to regulated entities and investors, the EC has also put in place a New
Entrants Reserve and will be backloading 900 million allowances to the final two
years of Phase III in order to enhance market liquidity, maintain a stable price and
increase near-term investment in emissions reduction technologies (ibid.). This is
on top of addition new sectors and gases to the EU ETS, a signal that the EC believes
the system is functioning well and has a bright future within the EU’s regulatory
framework for climate change.
In another move to encourage investment in the system, the EC has proposed the
creation of a Market Stability Reserve to be implemented in 2019. The MSR acts as
an independent mechanism through which the market may operate more efficiently.
Should there exist a surplus of allowances in the market, an automatic trigger would
14
take surplus allowances above a specified level and place them into the MSR until
such time as the excess allowances are needed to provide market liquidity
(European Parliament, 2015). Through this mechanism, market liquidity would be
improved as well as protected via the EC’s ability to infuse the market with
additional allowances at the most opportune times thereby being able to control the
price of carbon at any given time. Further, in a show of independence and
impartiality, the MSR would operate “according to pre-defined rules which would
leave no discretion to the Commission or Member States in its implementation”
(Ec.europa.eu, 2015d). The MSR is an important example of how the EC is balancing
harmonisation with optimal regulatory oversight. Since the MSR is transparent and
subject to strict automated requirements, though the EC has the responsibility to
oversee the Reserve it has no independent ability to interpret how it is to be
implemented. If certain criteria are met, MSR mechanisms kick in until such time as
circumstances change. As will be shown later in this paper, this hands-off oversight
responsibility has begun to resemble that of RGGI, Inc. and may begin to provide the
foundational basis for such a regulatory oversight transformation.
Unfortunately, nothing more has yet been done to bolster compliance and
enforcement during this phase. Especially since discussions are already underway
to link the Australian and EU ETSs by 1 July 2018, improved oversight and
compliance reform must be on the EC’s radar.2 This reactive means of addressing
issues rather than proactivity is one of the issues set forth in this paper and an
aspect that will be dealt with in the subsequent section regarding the US RGGI. Still,
even with this reactivity, the EC is starting to look to the future in some regards,
already planning revisions that could be implemented during Phase IV.
2 Though the potential linkage of the Australian and EU emissions trading systems is not discussed in detail in this paper, its recommendation by the European Commission only elucidates the need for immediate structural reform based on global insights.
15
D. Phase IV (2021-2030)
Discussions for Phase IV are already underway. To reach the 40% GHG reduction
target by 2030, the EC has proposed the following goals: increasing the pace of
emissions cuts, better targeted carbon leakage rules, increasing investor confidence,
funding low-carbon innovation and energy sector modernisation (Ec.europa.eu,
2015c). In order to ensure they achieve these goals, the EC has carried out a
regulatory impact assessment and proposed to the European Parliament, the
Council and additional committees that the number of emissions allowances decline
at an annual rate of 2.2% (if not already the case during Phase III), free allocation of
allowances only for sectors at the highest risk for carbon leakage, and the creation
of two new funds, the Innovation Fund and the Modernisation Fund, in order to
assist the transition to a low-carbon economy (ibid.). Though these are merely
prospective at this point, they are worth a short discussion on how they would
operate within the broader structure of the system.
Unless earlier implemented in Phase III, total available emissions allowances will
decrease at an annual rate of 2.2% per annum in Phase IV. Speeding up the
emissions reduction process signals to investors that clean technology will become
ever more important in the coming years as regulated installations look to maintain
compliance. Further linked to this goal will be the creation of two new funds, the
Innovation Fund and the Modernisation Fund, which respectively provide the
stimuli to excel low-carbon technological innovation as well as a modernisation of
the energy sector. As these funds are controlled at the EC level, it is even further
evidence of centralised governance (even over policy choices) that will reverberate
well beyond the reach of the EU ETS.
While policy choices for the EU ETS are continuing to extend beyond the confines of
the system, another example is the EC’s apparent stance that it will seek to limit the
extent of carbon leakage by providing free allocation of allowances only to those
16
sectors at the greatest risk of such (Ec.europa.eu, 2015d). This move would signal
to investors that the sectors at greatest risk of carbon leakage are the ones that will
be most lucrative in which to invest thereby providing additional assurance that
investments will be made in these facilities addressing the problem at its source
rather than simply relocating the issue elsewhere, likely beyond the EU ETS’
jurisdiction.
However, even as novel ideas are put forth in order to address market liquidity and
raise the price of carbon, no additional ideas have been put forward to address
issues of compliance and enforcement. In order to round out the improved
economic mechanisms with likewise enhanced compliance and enforcement
mechanisms, it is imperative to begin thinking outside the box. In this context, we
must look outside of the control of the European Commission, beyond the 31
members of the EU ETS, to the two largest carbon emitting countries in the world
and how they are either proposing or have proposed overcoming these problems.
In order to deal with a system of this magnitude and complexity, we must seek
nuanced approaches from elsewhere in order to determine their applicability to the
system at hand. No one way of thinking can be applied across the board in each of
the various aspects of carbon emissions trading. Regulators must think bigger and
broader and then be able to take new ideas and tailor them to the scenario at hand.
In looking at the big picture, ensuring market integrity is the crucial key to a
successful system. Of course this is easier said than done. Market integrity requires
numerous items to come together in perfect harmony, including broad facets such
as transparency, reliability, predictability and flexibility. Additional insights need
not only come from the experience within the EU ETS. Other active and prospective
carbon markets can provide keen insight into how other jurisdictions are dealing
with similar issues. For example, viewing compliance in light of voluntary emissions
trading schemes can provide additional valuable mechanisms that incentivise
compliance rather than penalise it. And viewing how harmonisation is implemented
in a system with no centralised federal governmental regulator or a government in
17
which the federal element applies more stringent control over each aspect of the
system can bring with it key insights not otherwise apparent to a European-based
system. If the goal is to make the system better by any means, then consulting
various other comparable yet differentiated systems provides the opportunity for
such advancement.
IV. U.S. Regional Greenhouse Gas Initiative
A. Brief Overview
The US RGGI is currently comprised of nine mid-Atlantic and northeastern member
states (formerly ten prior to New Jersey’s voluntary withdrawal in 2011) that
agreed to form a cap-and-trade coalition at the regional level rather than in
response to a federal mandated programme. Due to the fact that the federal
government has failed to push carbon dioxide emissions trading legislation through
Congress (and the Clean Power Plan has yet to see full implementation), states have
taken it upon themselves to regulate this greenhouse gas as best as they see fit.3
Unlike the EU ETS whose centralised power is contained within the historically
galvanised European Commission, the US RGGI formed a new 501(c)(3) corporation
for the sole purpose of being a facilitating entity for the emissions trading system. 4
However, there are certain similarities between the systems, some of which are
reminiscent of the 2003 ETS Directive prior to the more harmonised approach
adopted in the 2009 amendment. RGGI member states are bound by a centralised,
absolute emissions cap that is then proportionately distributed amongst the states
based on their baseline emissions levels (Regional Greenhouse Gas Initiative, 2005,
pp.2-3). Further, allowance allocation is mainly via quarterly auctions, rather than
3 For state-specific instances and how the EPA is assisting states, see http://epa.gov/statelocalclimate.4 An in-depth analysis of this dynamic between the operating structures of the European Commission and RGGI, Inc. is discussed in the next section.
18
free allocation, and is organised by RGGI, Inc. However, this is where the
harmonised approach tapers off.
Though monitoring is a centralised task (RGGI, Inc. has responsibility for the
development and maintenance of the RGGI CO2 Allowance Tracking System (RGGI
COATS)), reporting and verification are all accomplished at the state level (RGGI,
Inc., 2006). State-level regulations control reporting and verification through
quarterly CO2 emission reports to each member state’s environmental agency (plus
the potential for quarterly reporting to the federal EPA as required on an
installation-specific basis). Once reported, each member state’s environmental
agency is required to verify the reports, with the additional requirement of third
party verification for all CO2 offset allowances (ibid.). However, there are aspects of
the RGGI that meaningfully differ from the EU ETS: the centralised authority’s legal
structure and operational competencies, and compliance mechanisms.
B. RGGI, Inc. v. the European Commission – An Operational Analysis
The institutional organisations (whether governmental or non-governmental) that
in essence preside over an emission trading system have the great responsibility to
ensure that the programme operates as smoothly as possible. Even in cases where
the organisation’s authority is imparted by those over which they regulate, or where
the organisation is provided little operational power, that the organisation exists in
the first place points to the fact that it is a necessary creation that is afforded its
proper place in the system. In the case of the EU ETS, the European Commission is
responsible for supranational decision-making, while RGGI Inc. is its counterpart in
the US RGGI.
Though each may be imbued with different operational authority, they operate on
the same plane with regard to ETS structure. It is important then to examine the
legal and operational confines in which each acts to first determine the efficiency of
19
each and subsequently to determine if there is any merit in applying some of the
principles of the RGGI structure to the EU ETS. That is to say, does the European
Commission provide the most effective and efficient oversight given the paralleled
success of its vastly different counterpart in the United States? This section will
provide an overview of each of the European Commission and RGGI Inc., analyse
where each has been successful (or less successful) in its applicable ETS, and
extrapolate whether the idea of a fledgling oversight entity with limited authority in
a centralised governance structure could have any implications for the EU ETS.
European Commission
The European Commission has a rich tradition and history as an executive body for
the European Union. Originating in 1951, the EC has the power to exercise the
following functions: proposing legislation, implementing decisions, upholding EU
treaties and managing the day-to-day business of the EU (Europa.eu, 2015). In all
respects, the EC is immensely intertwined in political affairs and has broad (yet
targeted) enforcement authority.
Operationally, 28 members head the EC, one elected from each Member State, with a
single President, a member who is proposed by the European Council and elected by
the European Parliament. Through this structure, each Member State has a voice in
the operation of the EU, though each member is required to act impartially with
respect to the goals and aims of their particular Member State, rather acting for the
European Union as a whole. Acting as an independent supranational authority
separate from state governments, and as previously noted in this paper, the EC has
recently received more authority to control how the EU ETS is implemented.
Necessarily, even though there is an independence from state governments, it is
much harder to maintain an independence from other related or correlated policy
decisions that may impact the EC’s actions. As the EC acts in a multi-purpose
fashion, and not to singularly implement the EU ETS, there is a threat of policy
20
leakage and bureaucratic politicking from other areas of responsibility into the
decisions of the EU ETS.
Moore (2013) rationalised the idea that a newly adopted independent agency may
be helpful in providing assistance to the EC, especially as it relates to short-term
interventions in the market, namely pre-established timetables and defined sets of
criteria (pp.10, 48-51). Taking this one step further, an independent agency may be
better suited to replace the EC as the oversight body of the EC for various reasons.
As will be shown in the following section, RGGI Inc. has a vastly different legal and
operating structure that brings with it it’s own strengths and weaknesses. However,
even though it has originated out of a different set of circumstances and through a
different operational context, RGGI Inc. may be able to provide some lessons for
improving the EU ETS by starting at the top of the hierarchical structure.
RGGI, Inc.
RGGI, Inc. (the Corporation) was formed as a 501(c)(3) non-stock, non-profit
corporation with a singular purpose: to act as a supra-state entity into which certain
enumerated responsibilities may be placed with regard to the US RGGI (RGGI, Inc.,
2007). The Corporation is controlled by a Board of Directors totaling 18 members,
two from each member state: one who is the head of the state’s energy regulatory
agency and the other who is the head of the state’s environmental regulatory
agency, unless otherwise specified by the state’s governor in special circumstances
(ibid.). These directors are appointed for a term that lasts until death, resignation or
removal (ibid.). Similar to the EC, Board members and officers of the Corporation
have a fiduciary obligation to reach decisions that benefit the Corporation as a
whole and are required to act without personal interest based on state preferences
(RGGI, Inc., 2014). Therefore, there exists the same need for Directors to remain
impartial and independent of the states in which they work and reside, instead
working for the general benefit of the US RGGI.
21
However, in stark contrast to the EC, the Corporation did not exist prior to the
creation of the US RGGI nor will it exist should it fail or otherwise be terminated.
The singular purpose of RGGI Inc. is evident as it is isolated from separate policy and
operational decisions. Though the enumerated purposes of the Corporation in its
by-laws are sufficiently broad in order to allow it to operate as a quasi-
governmental entity capable of creating and enforcing policy, it lacks the express
authority to act in such ways, being limited to the following activities (and further
limited based on individual operational contracts with each state): to act as a forum
for collective deliberation and action; developing, implementing and maintaining a
system to receive and store reported emissions data, and to track allowances;
developing, implementing and maintaining a platform for the auctioning of
allowances; providing technical support for the development of proposed changes
to the RGGI programme; conducting market monitoring related to the trading of
emission allowances; and providing technical assistance in reviewing and assessing
applications for GHG emissions offset projects (RGGI, Inc., 2007).
As the US RGGI was a voluntary coalition of states, it should come as no surprise that
the Corporation is essentially an entity created by agreement of the states that has
limited authority and exists mainly to provide an independent authority to which
the states may look should they need specific technical expertise. Though there is a
level of harmonisation and centralised authority within the Corporation, the states
have structured the system in a way that allows them to make most important
decisions within their boundaries based on their particular needs and then look to
the Corporation should there be an issue that applies broadly across jurisdictions.
This is even further seen through individual, state-specific contracts with the
Corporation that explicitly enumerates its function with regard to the particular
state and make appropriate budgetary allocations. Since state ties to the
Corporation are loose-knit and based on the particular state’s will to be bound by
contractual obligations, the ability to exit the system is relatively simple; the
example of New Jersey’s exit in 2011 is quite telling as they believed that they had
already met their long-term emissions reduction responsibilities and therefore did
22
not want to be subject to any additional oversight of their state programmes and
subsequently voluntarily removed themselves from the US RGGI (Navarro, 2011).
Applicability of RGGI, Inc. Principles to the EU ETS
Though not an exhaustive analysis and application of utilising the form and function
of RGGI Inc. with respect to the EU ETS, there are some resulting ideas of note that
could subsequently be explored in greater detail. First, the creation of a new
organisation without any historical predispositions could provide increased
impartiality in the operational effectiveness of the system. Second, an organisation
that is essentially structured as a single-purpose entity, one with the sole purpose of
operating and improving the carbon trading system, provides a source of specialised
knowledge without the need for anything extraneous or superfluous. Finally, an
executive committee (or Board of Directors or similar body) comprised of experts in
energy and environmental regulatory fields, rather than general, elected political
figures provides both increased specificity when it comes to operating and adapting
the system, as well as increased impartiality when it comes to making decisions, as
even though their state of residence may affect their decisions but their decisions
would be based only on their area of focus in the energy/environmental realms
rather than politicians who have broad-based platforms where interconnected
policies may detract from one another.
Let us quickly envision the United Nations, a supranational organisation whose
mission is to promote global human rights, prosperity and well-being, climate
change adaptation and resilience, sustainable development, gender equality,
governance, food production and peace and security (UN.org, 2015). Now suppose
that Country A is unequivocally denying its citizens of their basic human rights.
What is the UN’s likely response? It would not be surprising to see a peace envoy
and possibly even action of the Security Council. Why? Because this is what the UN
does, what it has done in the past and what it has made known that it will do in the
future. Circling back to the topic at hand, the same preordained responsiveness of
23
the EC could be highlighted. With the EC there is a historical context for their
actions that guide presuppositions for future action. To state that specific actions
are guaranteed is too strong a theory, but to believe that historical decisions are not
going to influence future action is ignorant. For that reason alone, looking at the
idea of creating a new, apolitical organisation with the singular purpose of operating
and improving a carbon emission trading system could provide the EU ETS with a
fresh look at regulatory and market reform. With no historical context in which
they would be forced to adhere, this new organisation would be free to blaze its own
trail, to be uninhibited by diffuse political ambitions. With no presuppositions, such
an organisation would be free to amalgamate its structure and policies based on the
task at hand and not five decades of historical baggage.
As touched upon previously, the creation of a new organisation with the singular
purpose of creating and operating an effective and efficient market for carbon
emissions has its merits. When extraneous aspects are removed from the field of
view, the focus itself becomes illuminated. Rather than limitations on EC authority
based on EU law, a specialised organisation may be formed and run separate from
legal principles limiting centralised authority or harmonisation. Whether this
would result in more or less of these items, it would remain to be seen, but the
removal of a presupposition in favour of one or the other would allow for a more
efficient allocation of responsibility based on its effectiveness and not its ability to
fit within predetermined boxes created in the past for different purposes. Though
some ideas are lasting and relevant throughout the ages, others must not be allowed
to continually insert themselves in new arenas just because they have been utilised
(even successfully) in the past.
Similarly, a political organisation is not necessarily the optimal bureaucratic
structure when it comes to carbon market oversight. Elected officials take office
based on the platform on which they ran. These ideals become reference points to
which they must adhere during their tenure lest they find themselves removed from
the position in the next election cycle. However, appointed heads of energy and
24
environmental regulatory bodies are, to a lesser extent, obliged to follow a specific
platform. While they will have their own beliefs and may or may not agree with
their country’s/state’s policies, they did not have to publicly tout their beliefs in
order to be appointed to their current position. Therefore, the Board members of
RGGI Inc. start from a position of improved impartiality and legitimacy with fewer
preconceived notions about what to do or certain aspects of emissions trading that
may be non-negotiable in their minds. Though each entity’s purpose (EC and RGGI
Inc. alike) is to be impartial and work purely to further the ETS, this is necessarily
much easier to accomplish when political ambitions and rhetoric are removed from
the equation. RGGI Board members are also specialists in their respective fields, not
generalists such as the EC officials. With deep knowledge of emissions reduction
methods and the markets in which the ETS operates, these individuals are able to
tackle the minutia and complexities that arise within these programmes. Rather
than being advised by others, they are themselves advisors and are able to pool
their knowledge and specific experiences in order to address the issues that may
arise. However, even with this deep specialised knowledge, they still saw fit to
mandate extensive programme reviews in order to regularly examine how well the
market is functioning and make changes, if necessary. This topic will be further
discussed in subsection D below.
C. Compliance Mechanisms
Compliance in the context of emissions trading varies, sometimes drastically, across
jurisdictions. In the case of the US RGGI, aspects of compliance are both more and
less stringent that its European counterpart. With regard to less stringent aspects,
the RGGI noncompliance price for failure to surrender the requisite number of
allowances is three times the allowance price. Though at any one time this price
may be higher (in absolute terms) than the EU ETS compliance price of €100,
proportionately it is drastically lower and therefore can be seen as less of a
deterrence mechanism. While the EU ETS is more stringent in this regard, the RGGI
25
approach does potentially carry with it some usefulness as tying the noncompliance
price to the price of allowances assures that it provides the same level of deterrence
regardless of the market price for carbon. Though merely tripling the market price
may not be the greatest deterrent, it provides certainty to noncompliant entities
that they will pay a certain multiplier of the current carbon price and therefore will
always be deterred at the same level rather than paying a set compliance price
against which they can hedge and pay less (in the form of a penalty, not as in
absolute monetary terms) as the market price increases.
Though the United States is generally a source of stringent command-and-control
regulation as well as rigid punishment for legal offenders, this more laissez-faire
approach underlies another area in which the RGGI may be seen as more flexible
while still maintaining its effectiveness: compliance control periods. The Model
Rule requires that each regulated entity holds 50% of their allowance obligation at
the end of each interim control period (defined as the first two years of each three
year compliance period), rising to full 100% allowance requirements at the end of
the three year compliance period (RGGI, Inc., 2013a). Rather than the requirement
of annual compliance periods, as is the case with the EU ETS, the RGGI provides
increased flexibility to regulated entities that allows for longer-term investments in
either energy efficiency or clean energy. Though this may superficially seem to be a
more lenient approach to compliance than in the EU, we must remember that these
states are voluntary participants in the system and, therefore, have to view
compliance through a different lens. Even with the more lenient approach,
comparable levels of compliance can be seen between the systems (96% for most
recent RGGI control period; 99% in 2014 for the EU ETS)(RGGI, Inc., 2015;
European Commission, 2015), which becomes especially noteworthy when
considering that the EU ETS has several additional years under its belt during which
it has had the ability to tweak its rules in order to bring compliance levels closer to
100%. Here we see that sometimes the carrot can be more effective than the stick.
While regulated entities want to achieve compliance, each entity may have
differentiated needs that require additional flexibility in order to achieve a
26
generalised level of compliance and the regulator’s acknowledgement of this is
crucial. Providing this additional flexibility, while still requiring a defined endpoint
where compliance must be achieved or penalties are assessed, allows for additional
creativity (and investment) on the part of regulated entities, as well as the potential
for a higher level of satisfaction with the system in general and its continuance in
the years going forward.
D. Mandated Programme Reviews
From the very beginning, as contained in the Memorandum of Understanding, a
comprehensive programme review was required in 2012 (Regional Greenhouse Gas
Initiative, 2005, p.10). Such review required the extensive examination of the
following programme components: program success; program impacts (as to price
and system reliability); additional reductions; imports and emissions leakage; and
offsets (price, availability and environmental integrity)(ibid.). This was not in
response to any perceived or actual shortcomings of the programme, but rather
envisioned as a necessary requirement in order to continuously improve the RGGI
and put in place prior to the ability to determine any shortcoming in the system
(ibid.). Throughout the 2012 programme review there was extensive stakeholder
engagement including the regulator, regulated entities, public and private
organisations and industry experts (RGGI, Inc., 2013b). From top-to-bottom the
programme was thoroughly dissected and then put back together, sometimes with
new requirements that were deemed necessary to ensure the RGGI’s continued
success.
Out of the 2012 programme review came several updates that were formalised in
the updated Model Rule dated 23 December 2013: size (45% reduction) and annual
percentage reduction of the regional emissions cap; banking of allowances and their
affect on the cap; the creation of Interim Control Periods and the requisite emissions
allowances to be held during such; the creation of a Cost Containment Reserve
27
(similar to the EU ETS’s Market Stability Reserve); updates to offsets and their
trigger mechanisms; and additional cleanup of unnecessary provisions from past
periods or the updating of definitions based on changed provisions (RGGI, Inc.,
2013).
The main point of a required comprehensive programme review is simple: provide
regulatory and investor certainty as to when and if changes may be made to the ETS.
In viewing this topic from the vantage point of the EU ETS, while revisions have
been made, there is nothing requiring these reviews to take place and, further, such
reviews are generally limited in scope to address some specific aspect of the
programme that has caused issue during the previous phase. There is no certainty
that these reviews will take place nor is there extensive stakeholder engagement to
allow for additional transparency and legitimacy. In order to improve upon a
programme as complex and nuanced as a CO2 cap-and-trade programme, certainty
goes a long way in providing confidence to an ever changing regulatory and policy
landscape.
V. Chinese Pilot Programmes
A. Brief Overview
Currently accounting for 24.6% of global GHG emissions, China has ranked as the
world’s largest carbon dioxide emitter since 2007 (Jiang, Ye & Ma, 2014; Munnings
et al., 2014). In its twelfth Five-Year Plan (2011-2015), China outlined one piece of
the puzzle to combatting these statistics: the creation of a CO2 cap-and-trade
programme (China. National Development and Reform Commission, 2011).
Through this plan, a carbon emission trading system would be graduated structured
based on pilot programmes based in five cities (Beijing, Chongqing, Shanghai,
Shenzhen and Tianjin) and two provinces (Guangdong and Hubei)(ibid.) Gleaning
insights from these pilot programmes, a national system would then be
implemented between 2016 and 2020 (ibid.). As each of the seven programmes are
28
slightly different and nuanced based on their respective localities and importance
within the broader system, this section will discuss specific aspects of several pilot
programmes as well as some generalities common between all jurisdictions.
Under the oversight of the National Development and Reform Commission (NDRC),
a national registration system has been formed and will be managed, along with
registration and recordation of emission reduction projects. Further, common to all
programmes is the one-year compliance period, mainly free allocation of allowances
and an intensity-based (rather than absolute) emissions cap that is tied to GDP
(Munnings et al., 2014). Beyond this, local authorities have been given authority to
structure the programmes as they see fit.
China’s unique culture has brought with it problems either not seen or not as
important in the US and European systems. Poor data quality due to (i) small
penalties for obstruction of inspection and falsification of data, and (ii) vague and
ineffective rules to fight statistical corruption necessitate more stringent compliance
mechanisms (ibid. at 15). Further, as Shenzhen has the authority to overrule
specific aspects of national environmental law due to its designation as a special
economic zone, special care must be given to ensuring compliance in this
jurisdiction (ibid.). Though these differences pose unique challenges for China, they
allow for unique insight into how the EU ETS may nip further noncompliance in the
bud even before it becomes an issue, acting proactively rather than reactively. The
next subsection outlines some of the proposed compliance mechanisms unique to
the Chinese pilot programmes and how they may fit into the EU ETS without
restricting the functioning of the market.
B. Insights for the EU ETS
Compliance is a serious concern in the Chinese pilot programmes. Especially with a
contingent cap tied to GDP, ensuring that regulated entities meet their requirements
29
becomes the lifeblood of such an emissions trading system. It is because of this that
compliance mechanisms in the pilot programmes focus on specificity and stringency
while always looking to maintain legitimacy. Specifically, the pilot programmes
have adopted tiered fines, special treatments for compliance and noncompliance,
extreme name shaming and even piercing the legal veils of companies and assets in
order to address executives who have acted through illicit means.
Though the European and American approaches to fining noncompliance provide
for one set amount for failing to surrender the requisite number of emissions
allowances, the Chinese are going even further. The Shanghai programme provides
for tiered fines that vary based on the type of noncompliance: (i) noncompliance of
reporting fine between 10,000-30,000 CNY; (ii) noncompliance of verification fine
between 10,000-50,000 CNY; and (iii) noncompliance of surrendering quotas fine
between 50,000-100,000 CNY (Ernst & Young, 2014). Further, above and beyond a
dissuasive fine, noncompliance of surrendering quotas also requires a firm to
surrender that allowance shortage in the following year, effectively double
penalising noncompliance (ibid.). Through this differentiated priority system China
is able to provide tailored noncompliance solutions within specific confines so that
compliance costs are not unduly burdened by one-off penalties without any
guidance. If the EC were to implement this ideology within the EU ETS, it would
increase the proactive deterrence of non-compliers.
In taking compliance even further, China is testing additional special treatment for
noncompliance, as well as special treatment sought to reward compliance. With
regard to noncompliance, the government has provided guidance that
noncompliance can trigger not approving new projects or expansions or not
allowing the enterprise to apply for special government funding for a period of two
years (ibid. at 19). Beyond this, and with specific regard to rewarding compliance,
Guangdong has proposed granting priority status for national low-carbon
development funding to firms in compliance with the carbon market (Munnings et
al., 2014, p.15). Through both incentivising compliance and penalising
30
noncompliance, China has set forth an all-of-the-above to guide firms toward not
only achieving compliance so as not to be penalised but wanting to achieve
compliance in order to take advantage of funding that may be helpful in current and
future projects.
Rounding out China’s compliance innovations, they once again take dealing with
compliance, especially with regard to unlawful acts, to a new level. As with its
European and American counterparts, name shaming is a tool that is often utilised.
In Guangdong, compliance status is periodically published in order to create social
pressure for compliance; Shanghai publishes unlawful acts on a government website
or publicizes such through the media (ibid.). However, they do not stop there.
Shanghai has also taken to piercing the legal veil of firms by recording unlawful acts
onto the credit records not only of the firms but also of individuals chiefly in charge
(ibid.). Though this may be seen by western countries as overstepping, the
deterrence effect is unmistakable: if company executives fear personal retribution
rather than just impacts on their company then it may make them think longer and
harder before breaking the law (or possibly even voluntarily failing to comply with
carbon market regulation, as the natural extension from penalising unlawful activity
to similarly penalising noncompliance is not without precedent).
As seen above, China has been more thoughtful and stringent than its western
counterparts. Since, as Scott (2011) correctly noted, the EU has begun to exert its
material power (e.g. size of internal markets) to creates incentives for other states
to act in a particular way and as the EU ETS seeks linkages of programmes
elsewhere in the world, maintaining an extensive and stringent compliance
framework will allow the EU ETS to deter future problems that may be beyond their
immediate control. Even though EU law principles of proportionality and non-
discrimination provide some protection, these will not protect the EU ETS from
national policy decisions by those linked to their system. Therefore, embracing
China’s approach to compliance may provide additional assurance that linked
31
systems maintain the same (or vastly similar) compliance requirements in order to
maintain market liquidity and legitimacy.
VI. Conclusion and Recommendations
Identifying potential flaws in the EU ETS even before they present themselves
provides the ideal scenario for a thriving carbon market. Determining the correct
levels of harmonisation/subsidiarity and oversight will allow the EU ETS the
flexibility to function well, improve upon its success and link otherwise
incompatible emission trading systems. Further, improving compliance efforts
especially when taking into consideration Scott’s (2011) view of the EU unilaterally
imposing itself on the global policy arena, will provide fertile ground that linked
systems and developing countries will require down the line. For the EU ETS to
maintain its position in the line of current and emerging emissions trading systems,
the programme must be sufficiently forward-looking and implement ideas that may
not be currently seen as necessities. In order for the EU ETS to prepare itself for
these coming challenges and take advantage of resultant opportunities, the
European Commission and the Member States should carefully weigh the following
insights:
Independent Regulatory Authority. Create an organisation either as a
replacement for the European Commission (only as it relates to the EU ETS)
or as a supplemental authority to balance out the EC’s inadequacies. Remove
historic predispositions from the mix while promoting an independent
organisation led by career energy and environmental regulators.
Noncompliance Pricing. Tie noncompliance pricing to a multiple of the
current market price for carbon thereby providing certainty and lessening
the ability to hedge against price changes that would provide incentive for
noncompliance.
32
Flexible Compliance Control Periods. Extend compliance periods beyond a
single year while still providing interim milestones in order to provide
regulated entities the ability to make longer-term investments.
Mandated Programme Reviews. Require programme reviews between phases
in order to allow for extensive analyses of current mechanisms and
exhaustive opportunity for stakeholder feedback.
Tiered Fines. Signal the regulated community that each form of
noncompliance will be dealt with according to its relative impact on the
functioning of the market. Allow for a range of fine for each tier in order to
accommodate differing levels of impropriety.
Incentivising Compliance. Provide the regulated community with reasons to
seek compliance rather than merely avoiding penalisation. Monetary
incentives may be (at least partially) paid for through profits from allowance
auctions. Non-monetary incentives should both further the regulated entity’s
bottom line as well as the goals of the EU ETS.
Increasingly Stringent Noncompliance Penalties. Subtle forms of name
shaming should be changed to more public means of impacting future
business decisions. Impacting a company’s bottom line should be
supplemented with means by which companies may be removed from the
market for a limited time or by other means with the goal of proactively
deterring noncompliance.
While the above mechanisms can provide short-term solutions to current and
prospective issues, they will also allow for a bright future for the EU ETS by
continuously and proactively allowing the system to evolve. Because implementing
these mechanisms while seeking to link additional ETSs in the global arena creates
33
its own potential issues, further research should be done in order to understand
how these revisions would be perceived by other countries and whether they would
be a hindrance in any way to the bottom-up linking of systems into a global
framework in the future. No one way of tackling an issue constitute the entirety of
solutions and ETSs must learn from each other in order to address problems that
arise in these vastly complex systems; to treat these intricate issues as one-
dimensional and to therefore attempt to solve them in a similar fashion would be
short-sighted and ignorant.
34
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