«EUI Working Papers RSCAS 2012/23 ROBERT SCHUMAN CENTRE FOR ADVANCED STUDIES Global Governance Programme-18 MULTILEVEL GOVERNANCE OF INTERDEPENDENT ...»
The Kyoto Protocol, which entered into force in 2005 (after the ratification of Russia as the 55th country joining the Protocol), established a number of mechanisms to induce international cooperation on climate change mitigation. It has influenced the set-up of regulatory arrangements on regional levels by transforming the global legal vacuum into the codification of regional initiatives. Since climate change was considered “the biggest market failure the world has ever seen,” (Stern, 2007) the Kyoto Protocol aimed to convert the market failure through the systemic marketization of carbon emissions. This was approached through flexible mechanisms: emissions trading, joint implementation (JI), and the clean development mechanism (CDM) are meant to provide for large-scale development of market instruments in environmental policies. The protocol’s rationale was based on the assumption that the economics of global public goods provision determine the potential gains from cooperation as well as the degree of cooperation that can be sustained by the polycentric international regulatory order (Barrett, 1999, p.216).
Even though the protocol set emission reductions of only 5.2% for developed countries compared to 1990 levels (2008-2012), it provided an initial step that is necessary for developing effective global carbon governance in response to the realities of global interdependence, which requires multilevel governance of interdependent public goods (Petersmann, 2012a). In addition, the Kyoto Protocol’s stumbling process of ratification over seven years has helped increase discursive awareness of climate change as a matter of international politics.
Regardless, the global political community was not able to successfully negotiate a post-2012 follow-up agreement of the Kyoto Protocol at the UNFCCC conferences in Copenhagen (2009), Cancun (2010), and Durban (2011). According to the 2007 Bali Road Map (UNFCCC, 2007), the parties to the Kyoto Protocol agreed on adopting a binding post-Kyoto agreement at the Copenhagen conference already. Due to asymmetric expectations between developing, newly industrialized and developed countries toward a proportional global burden sharing of carbon dioxide (CO2) emission reductions, the conferences have failed to transform the emerging awareness into legally binding and enforceable post-Kyoto targets. Moreover, the negotiations in both Copenhagen and Cancun revealed a renaissance of sovereign nation state interests undermining the evolution of binding international norms. For the sake of protecting domestic growth and national economic welfare, nation states agreed to negotiate a post-Kyoto agreement until the end of 2015 through the Ad Hoc Working Group on the Durban Platform for Enhanced Action, and have decided to begin the second commitment period under the Kyoto Protocol on 1 January 2013 (AWG-KP, 2011). Parallel to this, global carbon dioxide emissions reached a historical record high in 2010 (after a dip in 2009), which is thought to be caused by the global financial crisis. This is considered to represent a serious setback to limiting the global rise in temperature to no more than 2ºC (for calculations on the remaining global budget of greenhouse gas emissions to reach an average global warming of 2°C by 2100, see M. Meinshausen et al., 2009;
WMO, 2011). According to the latest estimates of the International Energy Agency (IEA, 2011),
around 80% of projected emissions from the energy sector in 2020 are already locked in, as they will come from power plants that are currently in place or under construction today.
From this perspective, and as will be further shown in the following analysis, it remains doubtful whether the current system will secure a transition to low-carbon societies and a limitation of greenhouse gas emissions to safe levels, which have recently been described as being around an atmospheric CO2 concentration of 350-450 parts per million (Biermann, 2010, p.284). Considering the estimated time frame for reducing greenhouse gas emissions effectively, it remains questionable whether the marketization of carbon dioxide emissions represents an appropriate method of global public goods protection in the process of great (societal) transformation.
The Marketization of Public Goods: Carbon Emissions Trading
The European Union’s climate change policy is based on the ‘colonisation’ of regulatory approaches:
the United States (U.S.) have initially favoured the integration of supranational cap-and-trade systems to promote CO2 emission reductions, particularly during the Kyoto Protocol’s preparatory negotiations, whereas the European Union has repeatedly argued in favour of domestic taxes on carbon dioxide emissions. As the ratification of the Kyoto Protocol has been impeded by internal American politics, the U.S. have then neither been subject to any greenhouse gas reduction commitments of international legal origin nor developed any trading schemes on the federal levels.
Within the European Union, the integration of carbon taxes has instead been undermined by lacking European tax competences.
By contrast, the European Union has translated its Kyoto commitments to reduce greenhouse gas emissions by 8% into the directive: “establishing a scheme for greenhouse gas emission allowance trading within the Community.”(European Council, 2003) In the meantime, the intra-European trading system of greenhouse gases has evolved into the regulatory centre of gravity of the European Union’s climate change policy, reflecting both institutional success and functional disorder.
Cap-and-Trade in the EU: Discourses and Principles The EU ETS coincided with the enlargements of the European Union in 2004 and 2007, which were interpreted as constituting a risk to further internal market integration, and thus also to the consolidation and intensification of environmental protection within the Member States. At the same time, the emerging discourse on environmental marketization highlighted its theoretical capacity to allow for both economic competitiveness and environmental protection (Krämer, 2007, p.875). Based on theoretical conceptions put forward in the 1960s, emissions trading follows the revolutionary idea of understanding pollution as a simple element of industrial production, pollution is thus transformed into transferable and scarce legal rights as the market – as opposed to the government – might play a crucial role in environmental regulation (for an early account, see Coase, 1960, pp.1–44; Demsetz, 1967; for a theory based account on emission trading, see Parry and Williams III, 1999; Oberthür and Ott, 1999; Babiker et al., 2002; OECD, 1991). Such a systemic marketization of emission allowances contrasts with classical modes of environmental governance through its implied understanding of the state, the market created, and the rights allocated. As pollution trading was initially conceptualized as optimizing the allocation of common resources, the market discourse likewise reflects different strands of economic efficiency, private properties, and command-and-control (Bogojević, 2009; Meckling, 2011). Following the economic rationale behind market-based instruments, emissions trading has therefore widely been considered “to ensure that emissions reductions required to achieve a predetermined environmental outcome take place where the cost of reduction is the lowest.” (European Commission, 2000, p.8). In a 2000 preparatory green paper on emissions trading, the European Commission stated that emissions trading Global Public Goods and Asymmetric Markets: Carbon Emissions Trading and Border Carbon Adjustments “is a scheme whereby entities such as companies are allocated allowances for their emissions.
Companies that reduce their emissions by more than their allocated allowance can sell their 'surplus' to others who are not able to reach their target so easily. This trading does not undermine the environmental objective, since the overall amount of allowances is fixed. Rather, it enables cost-effective implementation of the overall target and provides incentives to invest in environmentally sound technologies.”(European Commission, 2000, p.4) On the basis of the ETS Directive 2003/87/EC, the initial operating phase of the European emission trading scheme started in 2005. As the Kyoto Protocol has allowed its parties jointly to fulfil the committed reductions in the framework of regional integration organisations, the European Union has adopted an internal burden-sharing agreement in order to facilitate differentiated emission reductions (European Council, 2002, recital 12, stating that ‘contributions are differentiated to take account i.e. of expectations for economic growth, the energy mix and the industrial structure of the respective Member State’).
The implementation of the directive, however, caused a number of unforeseeable legal complexities; even though the Member States opted for a decentralized setting of the trading system, the multi-level institutional requirements have profoundly challenged domestic administrations and agencies. The marketization of emission allowances has required a radical translation of ecological conditions into economic categories, and the development of an environmental logic of markets, prices and certified allowances.
According to the decentralized structure of the trading scheme, the functioning of the market largely depends on national legal environments. The primary way in which Member States are meant to achieve their emission targets is by reducing emissions within their territory. On top of this, the states can relieve their economies by purchasing additional emission allowances through CDM/JI mechanisms (Winter, 2010c, p.2). For the first two allocation periods of the EU ETS (2005-2007 and 2008-2012), the emission allowances were based on so-called national allocation plans (NAPs). The NAPs are developed on domestic administrative levels and are required to correspond to a set of procedural criteria established in Articles 9-11 and Annex III of Council Directive 2003/87/EC. For each allocation period, Member States have the obligation to draw up NAPs determining the totality of allowances (cap) allocated on national levels (macro-level), and the totality of allowances allocated to each installation (micro-level).
Regarding the powers of the Commission to review and reject NAPs, the European Court of First Instance (CFI) has recalled the limited scope of the Commission to monitor the conformity of the measures taken by the Member States with the criteria set out in the Council Directive 2003/87/EC (CFI, 2009, paragraph 89, 123). The decentralized cap-setting process can thus be understood as mainly reflecting the results of political negotiations over what is ecologically necessary and economically feasible. Environmental duties to cut emissions are therefore weakened by diverging perceptions of global climate change, by different calculations of costs and externalities, and by different opinions about the resilience of economies in the face of green development (Winter, 2010c, p.16). According to the Commission’s report, the total amount of verified emissions within the first trading period of the EU ETS (2005-2007) was 6.094 billion tonnes of CO2. This was shared by
32.073 installations throughout the EU’s 24 member states (27 member states minus Bulgaria, Malta and Romania) and mainly included power, heat and steam generation, oil refineries, iron and steel, paper and pulp, and building materials such as cement (EU ETS, 2008). Departing from available data of verified emissions, the first trading period – labelled the 'learning-by-doing' phase – has seen a net increase of 1.9%.
Carbon Market and Systemic Dysfunctions The European marketization of greenhouse gases has been considered to constitute a messianic model of effectively protecting global public goods in the 21st century. While this may hold in theory, however, in reality market conditions are imperfect and information provision is asymmetric.
In particular, the matrix of supranational markets for emission allowances is determined by considerable gaps between theory and practice, or between environmental rationalities and actorinduced market behaviour. As far as the first five operational years of emissions trading within the European Union are concerned, the analytical perspective provides a contradictory picture of policy development. On the one hand, the supranational EU ETS marks an unprecedented success with regard to its institutional set-up. On the other hand, the effective regulatory impact in terms of reduced CO2 emissions has only been moderately measurable, despite the initially promised “certainty of environmental outcome.” (European Commission, 2000, p.8). Although it is methodologically difficult to trace the concrete effects of a regulatory instrument, the conversion of ecological constraints (climate change mitigation) into market rationalities has caused a number of systemic malfunctions on both institutional and genuinely functional levels. In terms of the institutional sphere, the policy template establishing the supranational trading scheme itself has been challenging for the Member States. (Lodge, 2008) Even though the system has been characterized as a simple regulatory mechanism following the emergent market principle of ecological scarcity, the decentralized allocation of allowances created a great oversupply within the first trading phase.
Due to the imbalance of caps set in the Member States, the pricebuilding of carbon emissions has experienced significant price concessions and accompanying trade regressions (see figure 1).
For this reason, the ETS allowance prices have often been set far below the market price for a tonne of CO2. The over-allocation of permits caused a price collapse in 2007/2008 as verified greenhouse gas Global Public Goods and Asymmetric Markets: Carbon Emissions Trading and Border Carbon Adjustments emissions in the first trading phase were about 4% lower than the number of allowances distributed to ETS installations (for an indication, see Ellerman and Buchner, 2008; McAllister, 2009, p.408).