price floor in the electricity sector in 2017 (The Guardian, 2016). Germany discussed an additional “climate levy” for old coal power plants (BMWi, 2015) as well as a general carbon price floor (Bloomberg, 2016b). The former showed the potential to reconcile EU and nationalclimatepolicies (Peterson, 2015) . However, both ideas have been dismissed at least for the moment. The general problem ofthe current additional nationalpolicies is that they are i) not effective in terms of additional emission reductions because with an unchanged amount of EU ETS allowances any national emission reductions within the EU ETS are offset elsewhere and ii) not efficient since they drive further wedges between carbon prices. In this context, B¨ ohringer et al. (2008) and Heindl et al. (2014) show that an additional national carbon tax in the ETS sector in one or more countries further increase EU-wide inefficiencies. Both papers impose a tax on top ofthe allowance price in the ETS sector (which is equivalent to a carbon price floor for the ETS sector) in one region while keeping the overall joint emission quantity target constant. On the one hand, the higher carbon price in the taxing region leads to an increase of overall abatement costs. On the other hand, firms in the taxing region emit less and sell their excess emission allowances, resulting in a fall ofthe EU allowance price. This leads to a decrease of overall abatement costs in the EU ETS because non-taxing regions face a lower price and abate less emissions. The authors find that the net effect is always an increase in overall abatement costs and thus higher inefficiencies. The non-ETS sector is disregarded because it is not affected by the tax policy in the ETS sector. Heindl et al. (2014) show that the general efficiency results also hold when allowing for uncertainty and correlation of abatement costs across countries as well as different country sizes in terms ofemissions.
The analysis of cost-effectiveness, dynamic push, distributional effects and institutional feasibility criteria have all pointed to one common issue with the EU ETS – the free allocation of permits. This design characteristic has caused the scheme to perform worse in these fields. The gradual replacement of free allocation with auctioning of permits would help curb the systems regressive effect on income distribution. Revenues gained from auctioning would help finance the required redistribution policies and increase the scheme’s long-term domestic acceptance (Venmans 2012). Wiese et al. (2019) claim that investing the revenues gained from auctioning permits into energy efficiency programs brings multiple benefits for the economy, such as even lower emissions from both ETS and non-ETS sectors, reduced economic and societal costs of transitioning to low-carbon technologies, higher political support to further tighten the cap. Their assessment on the current use of auctioning revenues by the EU member states showed that in 2017 only 22.4% of these revenues have been used to foster energy efficiency, so there is plenty of room for improvement. Fischer et al. (2003) have qualitatively and quantitively compared free with auctioned permits and found that auctioned permits will always yield higher innovation because of their emissions payment effect. As a solution for the negative impact that the high volatility of carbon price has on the dynamic push and general functioning ofthe permit market ofthe EU ETS, theEuropean Commission has decided to introduce the MSR, starting in January 2019. Rogge et al. (2011) suggest increasing the scheme’s cap stringency and accompanying it with another (international) environmental policy to increase the system’s innovation impact, which they regard is too low if we are to reach 2050 targets.
In this section, we analyze the effects ofthe EU-ETS on household welfare if the revenue obtained by the German government through the auctioning ofemissions allowances is returned to households via lump-sum rebates and, alternatively, as a reduction in social security contributions (SSC). At a carbon price of €25, the estimated yearly revenue is €7.5 billion, equivalent to the amount of permits the electricity sector requires times a carbon price of €25. With this amount the social security contributions rate could be reduced by 0.8 percentage points or provide a lump-sum transfer of €94 per person in the household. 10 As a point of comparison, as a result ofthe environmental fiscal reform, the German government generated revenues of roughly €17 billion per year (€9 billion from households directly and another €8 billion from industry) and was able to reduce SSC by 1.6 percentage points (Deutscher Bundestag 1999).
Starting with transaction data, the core problem I had to face lies in its incompleteness – in total, 101,858 or 10,2% of 994,280 transactions recorded from January 2005 to April 2017, all of which were performed between accounts ofthe same registry, lack information on at least one ofthe parties involved. Fig. 4.2 gives an impression ofthe magnitude of this effect. In absolute numbers, 15.5% of transactions completed during phase I&II exhibit missing values, which translates to 35.5% ofthe total transaction volume. Of all insufficiently labeled transactions, 34.0% alone were issued by UK accounts, whereas another 18.9% originated from Italy. The regional distribution ofthe remaining transactions, however, is more in line with the average transaction volumes of each member state during phase I&II. For another 4,568 transactions, information on both the acquiring and the transferring accounts is missing. Interest- ingly, the majority of these – 62.1% and 26.8% – originate from Austrian and Greek accounts. Further 3.5% were transferred from EU accounts, whereas the remaining national registries play only a minor role. However, it is worth mentioning that all of said gaps in the dataset are limited to dates ranging from 2005 to 2012. The causes of these irregularities are subject to speculation – neither literature nor the EUTL website give a clear indication as to why such a large proportion ofthe dataset is incomplete. Hence, it remains unclear wether the loss of data has occurred during the transition process from a national administrative structure to the current EUTL or if the data collected by thenational agencies had been incomplete in the first place. Apart from these corrupted entries, there are another 35,400 transactions involving accounts outside the EU ETS as well as CDM accounts, which also lack information on one ofthe parties involved. However, this does not constitute an irregularity, since the EUTL keeps no records of market participants not registered by thesystem.
Whether or not policymakers should be actively concerned with market price levels (or bounds) has been the focus of numerous debates following the sharp price declines in existing emission trading systems, such as theEuropeanUnionEmissionsTradingSystem (EU ETS) and the Regional Greenhouse Gas Initiative (see [Borenstein et al., 2015], [Grosjean et al., 2014] and references therein). Ideally, a policymaker would opt for an instrument of central control that has its instructions contingent on the state ofthe world revealed (e.g. eco- nomic shocks or technological advancements). By employing the ideal signal, the ex ante uncertainty would be eliminated ex-post and the optimum solution would be retained ([Weitzman, 1974]). However, designing a contingent instrument as such is very complex in practice and single-order policies are opted for instead ([Hepburn, 2006]).
60 ever before” (p. 432) and introduced a new method called “the buy, bank, burn program where, as the name suggests, one buys and banks allowances to be burned only in the future, once the emission cap has become exogenous; that is, when emission flows into the MSR end” (ibid.). Hence, since the allowances bought by nongovernmental organi- zations are not directly canceled like before but banked, they are not withdrawn from the market but count as banked instead which is why they do not reduce but might even in- crease the intake into the MSR and with that the potential cancelation via the cancelation mechanism (ibid.). The point in time when the bought allowances are burned is decisive since before burning them, the allowances are a part ofthe bank and it depends on the size ofthe bank whether there is an intake in the MSR in the next year. Since it might be the case that the size ofthe bank fluctuates around the threshold value, i. e. falls below it several times and rises above it again, like estimated by Osorio et al. (2020), the allow- ances should only be irreversibly cancelled if it is safe to expect that the threshold value will not be exceeded again. With this “buy, bank and burn” method, “[p]arties outside EU ETS can burn allowances at more than 100% efficiency, partly paid for by regulated in- dustries” (ibid., p. 433) since “[i]n order to offset 1 ton ofemissions, an agent need only buy and bank 3/5 tons worth of allowances” (ibid.). This is why today a new service to buy, bank and later burn EU ETS allowances is offered by organizations like Compensa- tors*, 50ZERO or ForTomorrow (Compensators* e.V., 2020a). As an advantage of their offsetting service, they emphasize that emissions are avoided within Europe where per capita emissions are comparatively high and with this the incentives for European indus- tries to reduce emissions are strengthened whereas other offsetting organizations focus rather on projects in the global south (ibid.). Some of them directly work together with scientists, e. g. Grischa Perino controls the operations ofthe Compensators* organization as an additional authorized account holder ofthe allowance account (Compensators* e.V., 2020b). To conclude, consumers can use these services to buy, bank and later burn allow- ances to contribute to a reduction of total emissions in the EU and campaigns might hence also recommend this option. Compared to campaigns aiming at a demand reduction where consumers might spend their money elsewhere and the clean input might leak to other sectors, campaigns recommending to donate to a buy, bank and burn program seem to not face these leakage effects.
none of them doubted the effectiveness ofthe fundamental design ofthe EU ETS and did not aim to abolish and replace it with another instrument.
The policy process ofthe EU ETS revision was shaped by the then forthcoming UN climate conference in Copenhagen and the oil and gas concerns ofthe new EU member states of Eastern and Central Europe. As a consequence, the EU ETS Directive became part of a newly implemented climate and energy package. Four other directives were also part of this package and were negotiated in parallel. Moreover, the then forthcoming climate summit in Copenhagen caused a sped up policy process. This meant that the Commission‟s proposal did not have to pass all stages ofthe co-decision legislative procedure. Furthermore, theEuropean Council participated in the process, something that is very uncommon. On the one hand, this had the positive effect that the revision was highly supported by the heads ofthe member states. However, on the other hand, the Commission‟s proposal was in a way watered down and the Parliament‟s opportunities to influence the policy making process were weakened. The economic and financial crisis considerably changed the attitudes ofthe actors. During the time ofthe negotiations about theclimate and energy package, the support for climate policy was very high, something that significantly changed with the crisis. Economic issues became the highest priority on the political agenda and other political issues were delayed. This was also the case for the EU ETS, whose ineffectiveness became clear. The economic crisis had led to an automatic reduction ofemissions and thereby an oversupply of allowances and a decline in their prices. Moreover, the crisis resulted in a greater split between the member states of Northern and Western Europe and the member states of Central, Eastern and Southern Europe. Furthermore, the crisis created a feeling of disappointment around environmental politics as the ineffectiveness ofthe revised EU ETS became visible. Although the economic and financial crisis in the EU can be considered as being caused by neoliberal policies, this did not lead to a turning away. The EU tried to counteract the crisis with further neoliberal instruments. This was also the case when dealing with the problems ofthe EU ETS, as further neoliberal measures will be added to it.
The increasing threat ofclimate change demands a clear commitment with respect to greenhouse gas emission reduction at international, European and national level levels. Thus, specific policy measures and incentives need to be created in all the relevant areas. Probably the most famous climate political commitment up to now is the Kyoto agreement. This called for greenhouse gas emission (GHG) reductions of 8 % by theEuropeanUnion (EU) and 13 % for Austria (these targets are stated with respect to the base year 1990), and was phased out by the end of 2012. (UN, 1998) Although the Kyoto Protocol ran out, the three flexible mechanisms stated in the protocol to reach the emission reduction targets are still in action. These are the two project-based mechanisms, the Joint Implementation (JI) and the Clean Development Mechanism (CDM) along with theEmissionsTrading (ET) measure. One special arrangement of ET, and also a well-known policy measure in climate policy, is theEmissionsTrading Scheme oftheEuropeanUnion (hereafter EU ETS). In order to support the achievement of reduction targets in Austria, the possibility of integrating the Austrian waste management sector in the EU ETS is examined, since the waste management sector is not included in the EU ETS, neither in the first nor in the second trading period (2005-2007, 2008-2012). Although it has already been decided to add further sectors for the third trading period (2013-2020), the waste management sector is to remain outside thesystem. (EC, 2008c)
Beginning with the legislation ofthe “Climate and Energy Package” for 2020 (2020 package), two ﬁndings stand out (events #B1-6). First, reaching an agreement on 2020 targets and most notably the LRF of 1.74% has a considerable positive price impact. This focuses speci ﬁcally on the agreement in theEuropean Council in December 2008 (#B1). The release ofthe presidency conclusions on day 0 triggers a price rise of 4.87%. This price effect adds to a signi ﬁcant 3-day price increase of 7.46% in the pre- announcement period, suggesting that market participants anticipated the compromise based on the consensus ﬁnding process that often precedes ﬁnal votes. Taken together, the cumulative price effect over the [3;þ3] event window levels out at 14.95%; however, it is only moderately signi ﬁcant at the 10% level. In contrast, the ﬁnal adoption ofthe legislative 2020 package in April 2009 ( #B2) shows no additional information content at conventional signiﬁcance levels. We only document a positive antici- patory effect at low signi ﬁcance level. Second, the two releases on options to move from a 20% to a 30% emissions reduction target in May 2010 ( #B3) and February 2012 (#B4) had only a one-time and moderately positive price impact. In the case of a 30% target, the EU ETS cap in 2020 would be 34% below 2005 emissions rather than the 21% reduction planned under the 20% target. The absence of sustained price shift may relate to the fact that the conditions to move from 20% to 30% were not met (i.e. commitment of other developed countries to comparable emission reductions) and the provided information about the costs, bene ﬁts and options of scaling up ambition had no legal implications. Another interesting ﬁnding concerns the determination ofthe cap for 2013, the ﬁrst year of 2013–2020 trading period, on the basis ofthe legislated 2020 package (#B5 and #B6). Neither announcements are priced. This may be explained by the fact that the setup of annual caps under a ﬁxed periodic cap does not provide any additional information on the overall stringency ofthe EU ETS.
2 1 Introduction
Currently, about 17 percent of global greenhouse gas (GHG) emissions are covered by emissionstrading systems that have either already been implemented or are scheduled for implementation. The EU EmissionsTradingSystem (EU ETS) is still the largest of its kind worldwide. It covers roughly 40 percent ofthe EU27’s GHG emissions and is considered to be the EU’s most important climate policy instrument. Due to an annual linear reduction factor (LRF), no further allowances will enter the market beyond a certain point in time. Calculations based on the current LRF of 2.2% p.a. indicate the year 2057, or shortly after, as the expected cut-off date. In the likely case of a more ambitious EU climate target for 2030, the LRF would increase accordingly, so that the trajectory of newly issued allowances would reach the zero line some years earlier (European Commission 2018a). Given the recently agreed EU target of reaching net zero GHG emissions by 2050, there are even expectations that the installations covered by the EU ETS will generate net negative carbon dioxide (CO 2 ) emissions from 2045 onwards (European Commission 2018b).
TheEuropeanUnion established the largest greenhouse gas emissionstrading scheme in the world. The need for such regulatory frameworks to reduce green- house gas emissions became evident, at the latest, when the Intergovernmental Panel on Climate Change published its fourth assessment report in 2007. Accord- ing to this report, an uncontrolled anthropogenic production of greenhouse gases will lead, with almost absolute certainty, to climate change. “Continued green- house gas emissions at or above current rates would cause further warming and induce many changes in the global climatesystem.” 1 In particular, this would lead to global warming and sea level rises and thus floods, droughts, migration, and negative effects on agriculture and on human health are expectable. 2 The widely noticed Stern Review estimates the global costs of these negative effects ofclimate change and concludes that the uncontrolled production of greenhouse gases will “reduce welfare by an amount of equivalent to a reduction in consump- tion per head of between 5 and 20%.” 3 Even more problematic, these costs are unevenly distributed and the poorest countries and people will suffer most. Ac- cording to Stern, the costs of stabilization of greenhouse gas concentrations in the atmosphere, at a level that would prevent the most serious damage, are only around 1% of global GDP if actions are taken immediately. To achieve such a
1 Introduction: The meteoric career of an environmental policy instrument
If environmental policy featured in the Guinness Book of Records, emissionstrading on the international as well as theEuropean level would certainly occupy a prominent place. For in less than ten years – almost no time at all in international politics – it has been successfully introduced as a policy instrument. This is all the more surprising if we bear in mind that not one but several trading systems have been developed at various policy levels. In 1992, at the United Nations Conference on Environment and Develop- ment in Rio de Janeiro, international emissionstrading still seemed a long way off. But in 1996 the United States proposed its inclusion in the negotiations for the United Nations Framework Convention on Climate Change (UNFCCC), which then led to the Kyoto Protocol in 1997 and was further developed in the years until 2001 through the Marrakesh Accords. In a parallel process, with only a small time difference, the instrument was also introduced at theEuropean level. In 1998, with the Kyoto agreements in mind, theEuropeanUnion proposed the adoption of company-level emissionstrading; followed by a Green Paper in the year 2000, a draft directive oftheEuropean Commission in 2001, and a binding EU framework directive in 2003. And, since this directive had to be implemented at the level of each member-state, the instrument eventually reached the federal level ofthe EU-members states, again with only a small time lag. In Germany, the first mention ofemissionstrading was in theClimate Protection Programme adopted in the year 2000; early in 2001 the German government set up an EmissionsTrading Working Group to accompany the EU and international negotiation processes and to prepare an emissionstradingsystem; in 2004 the Bundestag incorporated the EU Directive on EmissionsTrading into German law; and since 1 January 2005 companies have been able to trade in emission certificates throughout the EU.
allow for business-friendly solutions. With respect to the review process required by the EU directive until June 2006, this ﬁ nding implies that a constructive dialogue between business, science and politics on experiences in the pilot phase ofthetrading scheme should be organised. At present, the allocation of al- lowances reﬂ ecting the emission reduction commit- ments of individual installations is the main challenge for industry. Therefore, distributional aspects and fundamental discussions on future energy strategies are currently dominating thenational debate. This is likely to remain the main topic in the next commitment periods, too. Nevertheless, business and politics are called upon to secure cost efﬁ ciency and the inherent ﬂ exibility of emission trading by minimising transaction costs, maximising market liquidity and establishing an effective incentive structure for emission reductions. In this context, future work should focus on internation- ally harmonised rules for new entrants and an optimal framework for investments in most efﬁ cient tech- nologies, research on the benchmarking approach to determine realistic future reduction targets, the mini- misation ofthe administrative burden and consistent solutions to the problem ofsystem boundaries. The latter could be solved by an optimal extension ofthetradingsystem, e.g. by applying a mid-stream ap- proach to fuel suppliers.
Boosting Non-State Climate Action in theEuropeanUnion Summary
The 2015 Paris Agreement and the accompanying Paris Decision recognise the importance ofclimate actions by non-state actors, such as businesses, civil society organisa- tions, cities, regions and cooperative initiatives, to reduce greenhouse gases (GHG) and to adapt to climate change as necessary complements to governmental commitments. Prominent international platforms, such as the Non-State Actor Zone for Climate Action (NAZCA) by the Secretariat ofthe United Nations Framework Convention on Climate Change (UNFCCC) and theClimate Initiatives Platform ad- ministered by the United Nations Environmental Pro- gramme/Technical University of Denmark (UNEP/DTU) Part- nership, have greatly improved the visibility of such actions. Within this dynamic field of non-state climate action, non- state actors based in theEuropeanUnion (EU) can be considered global leaders. Actions led by EU-based actors represent most initiatives registered with UNFCCC’s NAZCA platform. Moreover, individual member states have played leading roles in the Global Climate Action Agenda (also known as the Marrakech Partnership for Global Climate Action). A recent study by theEuropean Economic and Social Committee (EESC) and the German Develop- ment Institute / Deutsches Institut für Entwicklungspolitk (DIE) moreover finds that actions led by EU-based non- state actors are performing well compared with the global average (EESC, 2018).
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Widespread increases in government consumption across theEuropean economies following the recent financial crisis are a best example of such behavior. More generally, a supply shock, such as an oil-price shock would typically yield a similar reaction. Oil price is time- varying but the same for all analyzed economies, thus using oil price only would preclude inclusion of time fixed effects. The second term, threfore is an interaction between the oil price an the average fractionalization ofthe legislature over the analyzed period, measured as the probability that two deputies picked at random from among the government parties will be of different parties (Data by Williams, 2015, as included in the QoG2015 Database). Given that changes in the government might be a reaction to changing economic cir- cumstances, time-varying composition ofthe legislature is not exogenous. However, since we average out the time changes in the legislative composition, average orientation will be fully captured by the country fixed effects 17 . The interaction term itself varies by country and year, which allows us to control for time fixed effects. Conceptually, instrumenting for the government consumption with the interaction term is similar to a difference-in- differences estimation, in which the first-stage estimates compare changes in the govern- ment consumption to GDP between countries which highly fragmented legisltive bodies (and possibly instances of coalitional governments with many members) and countries in which the decision process is not as fragmented, following changes in the world oil prices 18 . The idea behind this instrument, relies on the speed ofthe decision-making process in the legislature as well as the established political economy observation that coalitional gov- ernments tend to increase spending. So, on the one hand, highly fractionalized legislatures will tend to show higher government consumption. On the other hand, highly fractionlized legislatures are likely to react differently to exgenous shocks, due to differences in the speed
• Political will to measure the impact of local and nationalpolicies separately – Our experiences with the city of Ham- burg show that there is an urgent political will to isolate the impact of local policies from those ofnationalpolicies. In- vestments in climate-related actions by a municipality cause opportunity costs (e.g. less investment in social infrastruc- ture). Therefore local governments require quantified fig- ures to legislate their decisions. From a scientific perspective so far it is neither always possible nor appropriate to isolate the impact of each individual local and national policy as there is a lack of data availability and there is usually no clear and simple linearity where one policy has only one single ef- fect. Nevertheless, the existing political will is to be seen as a task for the scientific community to develop methodologies and guidelines for an appropriate way to measure the im- pact of individual policies or policy packages. Our approach is to be seen as a first rough attempt to nudge the discussion. With respect to above described methodological challenges further research and improvements are needed in the follow- ing fields:
These ﬁndings show that the EU ETS has eﬀectively reduced GHG emissions in the regulated sectors without incurring substantial competitiveness e ﬀects. Put diﬀerently, ﬁrms abated emissions without those abatement activities showing up negatively in competitiveness. Most likely, the design ofthe scheme so far (over-allocation, mostly for free) has prevented the negative e ﬀects for ﬁrms on average. While this is good news for the current level ofEuropean competitiveness, could this mean short-term gains for long-term pain? A low carbon price undermines incentives for early investments in low-carbon technology and could a ﬀect the system’s dynamic e ﬃciency (minimization of long run abatement costs). Therefore, negative competitiveness eﬀects may just arise later, when more ambitious abatement will be required. At the same time, Vailles et al. (2017) argue that in Phase IV, energy e ﬃciency and renewable energy policies will enable emissions reductions that are already su ﬃcient to meet the EU ETS target. Finally, other elements suggest that ﬁrms would be capable of absorbing higher carbon prices, as demonstrated by their ability to pass costs onto consumers and due to the low burden of energy costs on average. Therefore, we conclude that strong negative e ﬀects on competitive- ness under the current and near-future design ofthe scheme are unlikely. In consequence, this means that pol- icymakers need not implement further relief for the average regulated ﬁrm.
different policy instruments [including emissionstrading] in order to better provide the international business community with a predictable and long- term perspective, and strengthen and extend market mechanisms by, inter alia, developing and extending existing programmes”. The G8 declaration refers to the ambitious 2050 objectives set up by Canada, the EU and Japan. While non-binding, this reference suggests that the G8 leaders are considering signifi- cant changes in emission patterns that are likely to increase the interest in emissionstrading schemes as well as other policy options.
A related paper by Antonelli and Fassio 5/2011 has a similar objective but measures innovation using the results from the Community Innovation Surveys from the period 2002- 2004. The dependent variable in this study is the introduction of a product or process innovation by the firm. The data coverage is cross sectional but now includes a wider dimension ofEuropeanUnion innovation environments: Belgium, Czech Republic, Germany, Italy, Norway and Spain. In principle the research question is quite similar to the previous one, even though the angle and focus are somewhat changed. Another important addition to this paper is the notion that spillovers are not freely captured. In fact, in this paper the access to usage of external knowledge is also considered the deliberate outcome ofthe firm‘s investment in what Cohen and Levinthal have coined ‗absorptive capacity‘ and proxies very precisely in this paper as well with investment in extramural R&D.