faculty of law
law and economics
24-10-2016 |
1
Sustainability myth: “The EU
Emissions Trading Scheme has failed”
Edwin Woerdman/ Fitsum Tiche
faculty of law
law and economics
24-10-2016 |
2
Sustainability myth
› “ETS, RIP?” The Economist (April 20, 2013)
› “No, Europe's ETS definitely doesn't work” The Interpreter (April 30, 2013)
› “The EU Emissions Trading Scheme has failed” REDD Monitor (April 16, 2013)
› “(…) failing EU carbon market threatens effectiveness (…)” Greenpeace (June 11,
2013)
› “The EU ETS failure as a model for the ‘green economy’” Carbon Trade Watch (June
17, 2013)
› “EU ETS (…): Why it can’t be reformed (…)” Corporate Europe (April 15, 2013)
faculty of law
law and economics
24-10-2016 |
3
Myth 1: The EU ETS doesn’t work
Lower than expected allowance price 
Source: Görlach 20
faculty of law
law and economics
24-10-2016 |
Myth 1…
Cap-and-trade (effective and efficient)
4
faculty of law
law and economics
24-10-2016 |
5
Myth 1…
› Primary legal objective:
 Article 1 EU ETS Directive: ‘(…) to promote reductions of greenhouse
gas emissions in a cost-effective and economically efficient manner’
› Secondary (or: implied) objectives
 Recital 20 in Preamble of EU ETS Directive: ‘encourage the use of
more energy-efficient technologies’.
faculty of law
law and economics
24-10-2016 |
6
Myth 1…
› Low allowance price =

in conformity with primary objective of cost-effective emission reductions and with
secondary objective of industry protection and carbon leakage prevention

in contradiction with secondary objective of low-carbon technological innovation
› Political response: indirectly raise allowance price
(lower cap, MSR, backloading)
faculty of law
law and economics
24-10-2016 |
7
Myth 2: Carbon tax would be more effective?
› The Economist and some academics focus on unforeseen recession under EU ETS:
‘carbon tax of e.g. € 20 would have delivered more emission reductions’
› What if unforeseen boom under EU ETS?

Allowance price higher than carbon tax level

More abatement, emissions target met (cap)
›
What if unforeseen boom under carbon tax?

Industry emissions would be above emissions target
faculty of law
law and economics
24-10-2016 |
8
Myth 2…
› Cap-and-trade with free allowances vs carbon tax

Similarity: cost of producing output

Differences:
- Free allowances add to industry profit, whereas tax revenue goes to public coffer
- In a recession the allowance price drops lowering compliance cost, contrary to tax
level
› Lower tax during ‘bust’ (& higher tax during ‘boom’)?

Deviates from assumption of a constant or increasing tax rate

Carbon tax in its time path will show more resemblance with emissions trading price
faculty of law
law and economics
24-10-2016 |
Conclusion
› Misconception 1 = EU ETS fails and carbon tax is better

No! ‘Boom’ tax ineffective, ‘bust’ tax carbon leakage
› Misconception 2 = EU ETS aim is low-carbon innovation

No! Primary aim is to reduce emissions at lowest cost
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