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«EUI Working Papers RSCAS 2012/23 ROBERT SCHUMAN CENTRE FOR ADVANCED STUDIES Global Governance Programme-18 MULTILEVEL GOVERNANCE OF INTERDEPENDENT ...»

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In addition to this, the 95% free of charge allocation of emission allowances has been transformed into considerable, so-called windfall-profits by energy suppliers, in accordance with the preliminary pricing of permits. Furthermore, as the economic logic of emissions trading also affects the regulatory law that is traditionally employed in sectors beyond industry and energy, the limited scope of sectors involved in the ETS, as well as the domestic protection of coal-fired power plants by the means of differentiated NAPs, has caused extensive criticism (Winter, 2010c, p.19; Wegener, 2009; Czybulka, 2008; Rat von Sachverständigen für Umweltfragen, 2008, paragraph 170). The NAPs were too complex in the first trading period, and were therefore not sufficiently transparent to provide the required level of structural certainty.

The limited impact of the trading scheme is also bound up with the regulatory interferences of the European emissions trading scheme and domestic subsidies for renewable energies. Firstly, the substitution of fossil fuel energy resources by renewables prevents conventional energy suppliers from buying emission permits. Secondly, if the total quantity of emission permits will not be reduced accordingly, then overall prices of greenhouse gas allowances fall, which counterproductively decreases the pricebuilding of climate-intensive energy production. The varied approaches of environmental regulation and the use of subsidies holds the risk of undermining the policy objective of emission trading schemes. Furthermore, the amended allocation process – in the third trading period – will accentuate the problem of domestic subsidies, as the free-of-charge allocation of allowances will mainly be replaced by a centralized auctioning mechanism.

In this regard, transplanting the scheme’s rationale into domestic administrative traditions has not only emphasized the limited responsiveness of imposed markets. It has also highlighted the requirement of robust monitoring and compliance regimes. Despite the limited effects of reducing greenhouse gases, the emissions trading scheme imposes significant transaction costs of administrative, as well as technical monitoring and economic supervision: costs that do not normally arise in standard regulatory law (Winter, 2010c, p.20). Taking into account the economic slowdown in the years of global recession, which has been strongly present in the sectors covered by the EU ETS, one can argue that the trading template was not able to provide efficient incentives to reduce CO2 emissions on a larger scale. As the market itself has subordinated the ecological objective of the trading scheme to its systemic functioning, the EU ETS has failed to develop the capacity of marketbased mechanisms to provide substantial protection of interdependent common goods.

Post-2012 Amendments: EU ETS 2.0 In accordance with its functional failure to provide an efficient policy design for the use of common resources within the first operational years, in 2008, the European Commission decided to amend the functional setting of the ETS for the third trading period (2013-2020). As the European Commission feared it would fail the UNFCCC’s objective to stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate systems, the Commission strengthened its efforts at avoiding increasing CO2 emissions. The EU has repeatedly reaffirmed the position of the Intergovernmental Panel on Climate Change (IPCC) that an increase in the global mean surface temperature should not exceed 2°C above pre-industrial levels.

An important step for the EU to achieve this goal is the effective implementation of the Kyoto Protocol’s commitments, with the EU ETS being the central instrument (Egenhofer, 2007; IPCC, 2001). Therefore, the Commission prepared an amendment of the EU ETS for the sake of tougher emission reduction targets for 2020 and beyond. The systematic amendment of the EU ETS 2.0 seeks to ensure that, after 2013, the trading scheme allows for more stringent emission caps (European Council, 2009 recital 2, 4). The Directive’s amendment therefore focused on increasing the scheme’s

Moritz Hartmann

economic efficiency on the basis of fully harmonised conditions of allocation within the European Union. In this regard, the European Commission envisages an annual reduction of allocated emissions by 1.74% (Council Directive 2009/29/EC, 2009, Article 9(1)).

In addition to cutting back the requirement of national allocation plans, the Commission decided to institutionalize auctioning as the basic principle for allocation, given its widely considered capacity to avoid windfall profits (European Council, 2009 recital 11). Installations in sectors or subsectors exposed to significant risks of carbon leakage, however, will be allocated allowances free of charge according to (Council Directive 2009/29/EC, 2009 Article 10a). In other words, the decentralized capsetting process will be amended from 2013 on, with the effects of centralizing the allocation of allowances under an EU-wide cap, extending auctioning as the principle allocation mechanism, and integrating (already from 2012) the aviation sector into the system (Hartmann, 2011). The trading scheme will also include further industrial greenhouse gases, and will exclude smaller installations from the trading system where other measures are applied (European Council, 2009 recital 11).





This section has shown that, on the one hand, the Commission has taken its 'learning-by-doing' understanding of the first trading phase of the EU ETS rather seriously. On the other hand, however, both the European Commission and the Member States have failed to engage together in normative discourses on whether the radical translation of environmental objectives into market elements (as a means to cope with environmental externalities) will have a regulatory future within the European Union and beyond (Winter, 2010b, 2010c, p.21).

Filling the Shadow of Hierarchy: Regional Trading Schemes As has been shown, the history of environmental regulation has seen the establishment of an emissions trading scheme in the European Union, although initially the US favoured the implementation of capand-trade systems. The Kyoto Protocol had two role models: the Montréal Protocol and the US Clean Air Act amendments. The latter policy has set a domestic ceiling for anthropogenic emissions, allocated a share to major polluting plants, and allowed these pollution entitlements to be traded. Even though the Clean Air Act has been considered to represent a regulatory success, climate change agreements are much more demanding in the sense that they intend cooperation on supranational levels (Barrett, 2003, p.398; United States Clean Air Act, 1963, significantly amended by 1990).

Both republican and democratic administrations have failed to adopt federal legislative acts on emissions trading, or more generally on reducing greenhouse gases. Lastly, the so-called WaxmanMarkey Bill (Waxman-Markey, 2009), which has been considered a turning point in US climate change policy, passed in the House of Representatives, but failed to pass the Senate due to the lack of a majority. The bill’s intention was to establish a cap-and-trade fully phased in 2016. It is therefore unlikely that the US will achieve real action on climate change mitigation at federal levels in the near future. In the shadow of this stall in federal legislation, however, US state and local governments have assumed the mantle of leadership over the past decade in addressing climate change and developing alternative programs (Snyder and Binder, 2009, p.232).

The North-American Regional Greenhouse Gas Initiative

The Regional Greenhouse Gas Initiative (RGGI) has been the first cap-and-trade system in the US to reduce greenhouse gas emissions developed on a bottom-up basis. The original plan dates back to 2003, when the Governor of New York Pitaraki called on North-Eastern governors “to develop a strategy that will help the region lead the nation in the effort to fight global climate change.” (New York State Department of Environmental Conservation, 2006). Followed by ten North-eastern and Mid-Atlantic states, comprising nearly 20% of the US economy, a working group in 2005 proposed a Memorandum of Understanding which specified the trading program’s aims: to stabilize, and Global Public Goods and Asymmetric Markets: Carbon Emissions Trading and Border Carbon Adjustments subsequently reduce, CO2 emissions within the associated states, and to design a regional emissions budget and allowance trading that will regulate CO2 emissions from fossil fuel-fired power plants with 25 MW or greater generating capacity (RGGI, 2005; for gross domestic product per state, see ‘U.S.

Bureau of Economic Analysis’, 2011).

At the same time, Article 6 of the RGGI’s Memorandum of Understanding states a clear-cut provision for the transition of the signatory states into comparable federals programs – if adopted. In 2006, the RGGI further developed a Model Rule for the allocation process of allowances. In essence, beginning in 2009 and lasting until 2014, the cap is set at the estimated amount of average emissions in 2008. Thereafter, the cap will be decreased by 2.5% each year until 2018, resulting in a total decrease in emissions of 10% from the 2008 baseline (see generally Funk, 2009, p.354; Ostrom, 2009, p.20; RGGI, 2012). The Memorandum of Understanding has committed states to invest 25% of the revenues from carbon credits in clean energy technologies, although as of 2010 three states had used the major part of the money to balance their overall budgets. With regard to the EU ETS first trading phase experiences, the RGGI has decided to auction the major part of its CO2 allowances as it ensures that all parties have access to CO2 allowances under uniform terms. To date, the RGGI has organized eleven auctions, the eleventh edition in March 2011, allocating around 41.9 million CO2 emission allowances. Nevertheless, the regional initiative has been estimated to be overallocated by 17% in its first year of operation: the power plants in the RGGI states which are subject to the program generated about 155 million tons of carbon dioxide in 2008, and the 2009 cap has been set at 188 million tons (Point Carbon, 2009). Consequently, the carbon price was set too low to unfold its demand-driving effect for clean energy and energy efficiency equipment; it becomes increasingly profitable for companies to shift to cleaner sources of energy instead of buying allowances to pollute (Pool, 2010).

Since the reduction of CO2 emissions largely depends on agency determinations of the feasibility of effectively reducing greenhouse gases, the RGGI’s overallocation emphasizes the regulatory requirement that caps have to be set at levels which ensure the programs’ technological and economic feasibility (McAllister, 2009, p.444). In this regard, the net effective impact of the RGGI in reducing greenhouse gas emissions has been limited within the first two operational years. Although only the stabilization of emissions was envisaged, the transaction costs have been considerably measurable. For this reason, in May 2011, the Governor of New Jersey announced they will pull out of the RGGI scheme due to its failure to effectively reduce greenhouse gases. Nonetheless, the RGGI’s first compliance period provides a legitimate working model and case study that requires further development, since it seems too early to perform a final evaluation of the system’s impact on emissions reductions. Moreover, regional 'voluntary' commitments are generating demand for, and catalysing investments in, clean energy technology, infrastructure, and workforce development until federal (or better: international) legislation will be adopted.

Regionalizing Emissions Trading: Western and Midwestern Initiatives When viewed from a meta-perspective, the RGGI has proven that a market-based price on powersector emissions is institutionally feasible in the US, and furthermore it may be of an indicative nature for federal clean energy legislation. The RGGI is also not the only program in the US that is developing a regional cap-and-trade scheme in the void created by the lack of federal legislation.

Apart from the Midwestern Regional Greenhouse Gas Reduction Accord, the Western Climate Initiative seeks to institutionalize trading systems on the basis of regional cooperation among states and provinces in both the US and Canada. The independent systems intend to take effect from 2012 onwards. Given the inclusion of California, the Western Climate Initiative’s goal to reduce greenhouse gas emissions by 15% – from 2005 levels – by 2020 covers the second largest emitter of carbon dioxide in the US, being itself the second largest CO2 emitter in the world after China (EPA, 2009a).

Irrespective of the regional scheme’s capacity to effectively establish its infrastructure, the regional initiatives indicate that even a patchwork of regional carbon markets can account for 41% of the US

Moritz Hartmann

emission reductions by 2020 as committed under the Copenhagen accord (FCCC, 2009), and can generate as much as 100 billion USD in revenue for clean energy investments at state levels (Point Carbon, 2010). The regional greenhouse gas trading schemes can thus serve as a temporary “Plan B” to fill the US energy efficiency vacuum, in the sense that a network of interlinked states and regional carbon markets, building off the existing institutional infrastructure of the RGGI and other initiatives, could be a workable backup plan in the face of internationally lacking agreements (Pool, 2010; see for global carbon governance, beyond the state, Biermann et al., 2010).

Environmental Concern as a Matter of Health?

Another indicator of environmental policy development has recently been taking shape in the US, with regard to the effective provision of global public goods. The Supreme Court, by a 5-4 majority in 2007, has ordered the US Federal Environmental Protection Agency (EPA) to rule whether heattrapping gases cause harmful effects for both the environment and public health under the Clean Air Act definition of air pollutants (Houlihan, 2010). Prior to this, the EPA made two determinations in

2003. In the first, it stated its lack of authority under the Clean Air Act to regulate carbon dioxide and other greenhouse gases for climate change purposes. Secondly, the EPA confirmed its stance of refusing to set greenhouse gas emissions standards for vehicles in the case of such authority (2003).



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