Shifts of Decisionmaking to the EU Level

This concise overview of the major revision of the EU ETS scheme shows that there will be a major shift from decision-making on the national level to the EU level. The national allocation plans and subsequent national allocation decisions will no longer be part of the future emissions trading scheme as proposed by the Commission, as there will be an EU-wide cap for the installations covered by the EU ETS. Moreover, the coverage of the scheme will be expanded. These arrangements would heavily influence the national climate change policies of the member states, as they will be restricted in their policy on reaching commitment with their national greenhouse gas emissions reduction targets. In the former national allocation plans national governments had a considerable degree of discretion regarding the industries covered by the EU ETS. The proposed approach takes away such discretion. The Commission explains that this decentralized system implied an incentive for member states to favor their 'own' industries.58 A 'race to the top' would in fact occur (meaning ample room for emissions) if member states aim to allocate as many allowances as possible. However, it would be wrong to assess this effect without taking into account the fact that the member states would need to comply with the national emissions reduction target if industries were to be allocated a relatively high share. In other words, an advantageous policy for the EU ETS sector would mean that the reduction efforts would be higher in other sectors. Another additional option for member states to follow is to compensate the generous approach for their industries by making use to some limited extent of the Kyoto mechanism, and thus buying credits abroad in order to compensate part of the emissions caused by the industries. The shift of the distribution of the room for emissions to industries to the EU level takes away the effect of member states having a generous approach to their industries, but raises the question of what the consequences are for national policies and thus the other relevant greenhouse gas emitting sectors. It has already been argued that the harmonized cap for the EU ETS sector would imply a disincentive for member states to impose measures on this sector that go further, as those measures would lead to a 'leakage' of allowances, and thus emissions, to other member states.59 If, for instance, additional emissions reduction measure were to be applied by a member state concerning an industrial sector covered by the EU

58 European Commission, Questions and Answers on the Commission's proposal to revise the EU Emissions Trading System, memo/08/35, Brussels, 23 January 2008, p. 3.

59 Netherlands Environmental Assessment Agency, Consequences of the European Policy Package on Climate and Energy, Bilthoven, 2008, available at

ETS, the available room for emission given by the EU ETS cap would still be used but then in other countries where such additional measures are lacking. As a consequence of this leakage effect, member states would focus their climate policies on other sectors, not covered by the EU ETS. In other words, member states could explore, in view of article 176 EC Treaty the adoption of measures that go further for the EU ETS industries, but in practice this is unlikely to happen in case of the proposed EU ETS cap, because of the leakage effect. Extra reductions in one member state might simply be nullified by fewer reductions in other member states.60 This shows that the establishment of an EU-wide cap does not only limit the national legislators in addressing the EU ETS sector, but also influences the intensity of national policies concerning the other sectors.

One other major revision is the shift towards auctioning. This auctioning of emissions rights was clearly not preferred by the European legislative institutions at the time of the adoption of Directive 2003/87.61 It is even prescribed by the initial EU ETS directive that the member states should allocate most of the allowances free during the first and second trading period. The initial directive does not furthermore contain any provision indicating the possible design of an auction, like whether auctioning shall be open to potential bidders from outside the national legal system.62 The political preference for a free allocation is stimulated by the nature of the environmental problem at hand: climate change is a world-wide problem that suffers from the fact that some states with important economies have not yet committed themselves to legally binding emissions reduction commitments. This means for Europe that submitting industries to auctioning costs while in other parts of the world meaningful emissions reduction obligations are lacking was not a preferable option. In this respect, one can see that the design of the initial European greenhouse gas emissions trading model has been influenced by the lack of progress towards binding commitments on the international level. Nevertheless, the possibility of auctioning has now been tabled by the Commission. This means that the EU will move from the present, as such, cumbersome grandfathering process towards the, in essence, simpler auctioning method. Instead of the (thus rather complicated) task for authorities to decide on allocation criteria that lead to a justified allocation of tradable permits free of charge, the auctioning method seems to require fewer governmental costs because it leaves the distribution of the allowances to the discretion of industries. These industries shall

60 The Netherlands Environmental Assessment Agency calls this the 'waterbed effect', p. 38.

61 Art. 10 of directive 2003/87.

62 Non-paper on the use of auctioning for allocating emissions trading allowances in the second trading period 2008-2012 and further on.

then determine how many allowances they need for a certain price, taking into account their marginal cost of abatement of the greenhouse gas. However, it remains to be seen whether auctioning will make it through the legislative process, and, if so, exactly how auctioning will be designed and implemented, and which legal problems will have to be solved in this respect. Moreover, the Commission does not only propose the auctioning method, but also proposes what should be done with an important share of the revenue from the auctioning.

The proposal of the Commission thus implies that the European legislator would develop a further influence on the national climate change policies. It herewith responds to the broadly heard wish to harmonize the system. This harmonized approach does not only relate to the new environmental target to be reached in 2020, because this could also have been provided by decision-making regarding the member states' emissions reductions targets for 2020 or even further. The current proposal also further harmonizes how that environmental target should be complied with, and takes away national discretion for important industrial sectors and the power sector. The option of an EU-wide cap for the covered industries, the expansion of the scheme, and the choice for obligatory auctioning with earmarked revenues and the choice for a separate treatment for sectors exposed to significant risks of carbon capture are the headlines. The initial directive already introduced a far-going harmonization of monitoring, reporting and notably also enforcement, thereby prescribing some administrative sanctions like a penalty and naming and shaming. This approach has been upheld in the proposal of the Commission.

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