Towards Auctioning The Transformation of European Green House Gas Emissions Trading System

Emissions trading systems have come to the fore as the most economically efficient mechanisms that can be employed to bring about an optimal greenhouse gas reduction goal. Even though much has been written about the advantages and disadvantages of these systems, one element of crucial importance – emission allowance allocation – has not been considered in adequate depth until the present study. Such an analysis takes on increased importance as it seems likely that market-based auctioning will become the default allocation method throughout the EU under a proposed amendment to the Emissions Trading System (ETS) established by Directive 2003/87/EC.

Taking a law and economics approach – that is, using a combined perspective of industrial economics and legal analysis – this important book examines the potential for anticompetitive distortion that may result from auctioning emission allowances. Among the issues investigated in depth are the following:

• whether the current setup of the EU ETS fosters allocative efficiency or whether this allocative efficiency is hindered by legal impediments or constraints;
• whether EU competition law can serve to remedy anticompetitive effects stemming from Member State actions taken pursuant to Directive 2003/87/EC;
• which allocation formats are most desirable from an allocative efficiency and environmental effectiveness point of view;
• the importance of initial allocation and adjustment of out-of-equilibrium situations under the amended ETS;
• whether auctioning allowances serves the attainment of market equilibrium even in the continuing presence of ‘polluter havens’;
• the effect of the ECJ’s so-called ‘joint application jurisprudence’ on the ETS; and
• the allocation of allowances from a state aid perspective.

The book provides both a coherent typology of emission allowance allocation mechanisms and the main characteristics of the present emissions trading system, setting the gained insights into a broader perspective. It examines how various assignment mechanisms deal with issues such as price determination, allocative efficiency and environmental effectiveness. It considers how market-based allocation mechanisms compare with administrative allocation mechanisms, particularly those based on the widely applied grandfathering method. And perhaps most important – and of especial value to practitioners and policymakers – it identifies the auction design challenges that must be addressed by the Commission in its implementing regulation due by 30 June 2010.