► Market Stability Mechanisms: Key determinants of price levels have been and will likely remain the long-term target set by the declining cap andmarket stability mechanisms. As mentioned in section 2.1.5, prices settling at or near the floor were highly likely from the outset of the program, the impact of complementary policies, and low price-responsiveness of abatement (Borenstein et al., 2019). These factors have elevated the importance of California’s market stability mechanisms in managing volatility and have largely done so successfully, as prices have increased gradually, largely in step with the rising Auction Reserve Price. The effectiveness of California’s complementary policies for key sectors, including renewable portfolio and low-carbon fuel standards, will also continue to play a strong role in the system’s long-run price trajectory. To conclude, the CaT system provides evidences that a price corridor, in particular in conjunction with complementary policies (which decrease the demand for allowances), has a strong tendency to decrease short-term price volatility, as the floor supports prices at the reserve price.
Since 1996, the EU has attempted to liberalize the European electricitymarket. However, Member States have been sluggish in implementing the EU Directive. Consequently, electricity markets are still dominated by few large electricity utilities (Joskow, 2008). The impact of market power on technological change has been strongly debated. On the one hand, it is argued that investment in R&D may be larger under market power than in the case of a competitive market, e.g. because firms can realize economies of scale and have more financial resources available (Aghion and Howitt, 1992; Grossman and Helpman, 1991; Schumpeter, 1942). On the other hand, it has been pointed out that firms which do not face competition may not be forced to be efficient and to innovate (Arrow, 1962b; Nickell, 1996; Porter, 1990). Moreover, there are some fundamental problems of markets with limited competition. Firstly, dominant firms tend to invest mainly in incremental improvements of technologies that are currently in use rather than in fundamental technological change (Grubb, 1997, p. 162). This often results in process rather than product innovation (Unruh, 2000, p. 821). Secondly, firms having market power may impede the entry of new competitors, e.g. by price manipulations or – in a vertically integrated industry – by denying grid access (Neuhoff, 2005, p. 95). This may impair the installation of renewable energy plants as they are often operated by market entrants. Thirdly, market entry barriers imply that there are fewer operating firms investing in innovation, i.e. a reduced probability of a technological break-through (Geroski, 1990). Finally, a dominant market position may change the behaviour of firm managers providing for some “managerial slack” (Aghion et al., 1999; Geroski, 1990). Instead, firms may invest significant resources in rent-seeking to protect its existing market position and generation structure. So overall, there are arguments why an insufficient liberalization of the EU electricitymarket, which impedes ample competition, may also compromise efficient technology choice.
national mitigation policies in order to achieve their more ambitious domestic mitigation goals. However, reliance on domestic policy instruments would create an inefficient pattern of regulation across the EU and would add to the factors working towards reducing the EUA price. The EU ETS is embedded in a multi-level governance structure, with Member States having diverging preferences over their technology mix and level of climate policy ambition. The EU ETS is not the only instrument for climate and energy policy, but based on the national sovereignty of the energy mix, Member States can implement additional measures, such as renewable support schemes, energy efficiency measures, or additional domestic carbon prices (UK) that interact with the EU ETS. This is likely to intensify asymmetries in marginal abatement costs across Member States and thus increase overall policy cost. In addition, these policies also do only reallocate but not on net reduce emissionsand can add to an even stronger reduction of the EUA price by exogenously reducing the allowance demand through channels identified in section 2.2, thus intensifying the problems of the EU ETS. At the same time, given the differences in envisaged levels and timing of climate policy targets across Member States, the question arises as to whether the EU ETS can be adjusted to help guide these divergent national preferences towards mutually beneficial outcomes. These points are revisited in the discussion of reform options in the next sections.
In addition to the principle of conferral, the EU’s ability to legislate is also defined by certain other principles, primarily those of subsidiarity and proportionality. The function of the subsidiarity principle is to ensure that decisions are taken as closely to the citizen as possible; the EU does not take action unless it is more efficient than action at the national, regional or local level. The subsidiarity principle therefor sets limits as to when the Union may use its competence in areas, such as environmental and energy policy, where it shares legislative power with the Member States (see further Section 3.2). Two conditions must be met for the Union to legislate in such areas: that the objectives of a proposed action cannot be sufficiently achieved by the Member States, and that these objectives can, because of their scale and effects, be better achieved at Union level (Article 5.3 TEU). Subsidiarity is seldom an obstacle to EU action in the field of environment: the scope for benefits from concerted EU action is clear, either because of the transboundary nature of the problem or because of the negative effects for the internal market of measures taken
The EU EmissionsTradingSystem (EU ETS) is the world’s largest carbon marketandthe EU’s ﬂagship tool to combat climate change. The launch of this transboundary carbon tradingsystem marked a severe tightening of environmental regulation in a uni- lateral way: Starting in the year 2005, EU ﬁrms in energy and manufacturing industries faced a strict cap on their total amount of greenhouse gas emissions while the perspec- tive for a widespread implementation of comparable regulations in other regions of the world was uncertain. Even though a number of regional and experimental carbon trad- ing programs were started subsequently to the EU ETS, these regionally or temporally conﬁned initiatives did not alter the unilateral character of the EU ETS in comparison to the substantially lower stringency of climate change policies outside of Europe. Against this backdrop, concerns about potentially negative competitiveness impacts on regulated businesses under the EU ETS were voiced from its inception and have not died out since. The concern that unilateral environmental regulations might impose signiﬁcant costs, divert resources from productive activities and ultimately put the international com- petitiveness of regulated ﬁrms at risk is widespread among economists, policymakers and industry representatives. In case of a persistent international asymmetry in the stringency of environmental regulation, the pollution haven hypothesis is that aﬀected businesses may move production capacity to countries that impose a lighter regulatory burden. In the context of climate change policies, such a shift creates “carbon leakage”, since theemissions would move together with the relocated production. In this scenario, the uni- lateral environmental policy backﬁres economically and ecologically, combining a loss of economic activity in industrial sectors with, at best, environmental ineﬀectiveness, or worse, an outright negative eﬀect if production outside of the regulated area is carried out in a more carbon intensive way. Such a process would manifest itself in the form of an erosion of the regulated ﬁrms’ asset bases in Europe.
Furthermore, some ‘dirty’ ﬁrms may have faced such high environmental costs from the EU ETS that they had to exit themarket. Similarly, multinational corporations with production units could delocalize their production outside the EU. In the end, only ﬁrms who were competitive in a clean environment could have kept their business running. In the aggregate, this would result in a more productive and cleaner business environment. This may explain ﬁnding no negative competitiveness eﬀects on ﬁrms that have stayed in themarket. If ﬁrms or subsidiaries exit themarket in order to relocate to places where environmental regulation is less restrictive ( ‘pol- lution havens ’), this is called the Pollution Haven Hypothesis (PHH; e.g. see Cole, 2004; Eskeland & Harrison, 2003; Kozluk & Timiliotis, 2016; Millimet & Roy, 2011; Wagner & Timmins, 2008; Yoon & Heshmati, 2017). In the case of the EU ETS, the PHH is supported if signi ﬁcant evidence of carbon leakage attributable to the EU ETS is established. If ﬁrms were to start emitting more once relocated, we could observe an increase in total emissions worldwide, making the EU ETS an ine ﬀective mechanism. No empirical evidence of carbon leakage or ﬁrm closures attributable due to the EU ETS has been documented so far. Preliminary results using emissions data by Dechezleprêtre, Gennaioli, Martin, and Muûls (2014) and Wagner et al. (2014) ﬁnd no supportive evidence for carbon leakage within companies which have non-treated plants during Phase II. Besides emissions, indirect measures of carbon leakage may be used. While short-term leakage is usually detected through increased imports, long-term production relocation may be analysed through outbound foreign direct investments (FDI, see Koch & Basse Mama, 2016). Several trade ﬂow analyses show that the carbon price level did not lead to any signi ﬁcant carbon leakage in the European primary aluminium sector (Sartor, 2012), in the cement and steel sectors (Boutabba & Lardic, 2017; Branger, Quirion, & Chevallier, 2017) or in manufacturing sectors 11 (Naegele & Zaklan, 2017). Focusing on German and Italian multinationals, respect- ively, Koch and Basse Mama (2016) and Borghesi, Franco, and Marin (2016) show that the EU ETS did not lead to relocation through outbound FDI for the average ﬁrm. However, both studies reveal that particular sub-groups of enterprises did signi ﬁcantly react to the EU ETS stringency. Still, overall, the scarce evidence so far shows no evidence of carbon leakage for the average ﬁrm, and thus contradicts the PHH.
WBGU (2011) argues that for the type of transformative change necessary to avoid (permanent- ly) trespassing planetary boundaries it is inevitable to internalise the external effects of carbon pollution into economic decision making. They argue for carbon pricing as a central building block of the regulatory framework to avoid dangerous climate change. However, WBGU also states that carbon pricing alone is not sufficient to redeem the various types of market failures that have led to the current unsustainable global socio-economic system. Grubb, Hourcade and Neuhoff (2014) go even one step further and opine that a global carbon price is a “false god” and argue that it is critical to complement it with policies that more immediately direct user behaviour and that actively govern or even steer innovation and strategic infrastructure development. The above assessment of the transformative potential of the EU ETS resonates well with this verdict: Market-based mitigation instruments can put a price on carbon, but this alone is not suf- ficient to induce the required change in unsustainable practices. Therefore, even if the flaws on the implementational level can be dealt with, the ETS will need to be integrated in a wider policy mix. It can be an effective instrument that puts economic pressure on current unsustainable prac- tices, if prices are high and stable enough and free allocation of permits is repealed. As such the ETS can function as a ‘motor of destabilisation’ of unsustainable economic practices, but it fails to be a ‘motor of innovation’ (Kivimaa and Kern 2015). As a technology neutral policy it does not provide a protected space for emerging more sustainable technologies. The EU ETS’s track record for spurring innovation is poor. More targeted policies are necessary to complement the ETS and make up for these deficiencies.
aspects. 8 This represents a trade-off between broad coverage of emissionsandthe avoidance of large MRV transaction costs per unit of emissions for some regulated companies.
A possible way to decrease transaction cost burdens while preserving effectiveness and broad coverage of regulation would be a strict ‘upstream’ policy design (Joas & Flachsland, 2014; Kerr & Duscha, 2015). In the EU ETS, regulation takes place at the installation level in an ‘end of the pipe’ manner. This makes the inclusion of small installations necessary. Under upstream regulation (as interpreted here), the carbon content of intermediate products (e.g. fossil fuels) is ‘priced’ by the upstream regulation system in the moment the products are put on themarket (Kerr & Duscha, 2015). In this case, greenhouse gas emissions are ‘priced’ at the source and not at the level of final (commercial) consumers. In this situation, the overall prices of carbon- intensive intermediate products incorporate the carbon price in case the products are resold. Such
through welfare state elements. As Keynesian policies failed at the end of the 1960s, there was the window of opportunity for neoliberalism to enter the political mainstream. It consolidated in political practice especially in the US under Reagan and in Britain under Thatcher. Since then it became hegemonic in many policy fields in the western countries. This development is connected to the fact that neoclassical macroeconomics replaced Keynesian macroeconomics in the 1970s. Neoliberal policies are based on neoclassical macroeconomic theory. However, it can be argued that the neoclassical economic theory is inappropriate and unfavourable for environmental protection and sustainability because the reality has shown that not all costs and benefits are included correctly in the price mechanism of themarket. Natural living conditions are destroyed and natural resources not protected (Rogall 2013: 82). Nevertheless, the US was able to introduce and enforce neoliberalism in the negotiations about climate action under the UN. As a consequence, emissionstrading became a central element of the Kyoto Protocol. The EU‟s initial position against flexible mechanisms such as emissionstrading changed andthe EU introduced the EU ETS in order to meet the Kyoto targets.
6 | 16 Another possible cause is the strong production of green energy in Europe. The commis- sion as well as single EU members have formulated goals for renewable energy and have introduced suitable development systems having a regulatory function that overlaps with the emission trade. For example, the fixed energy feed-in tariffs for renewable energy technologies in Germany andthe production of CO 2 -free green energy made possible by those tariffs both lead to a reduced demand for emission allowances in the German energy sector. The price for allowances goes down, so that market participants of other sectors or countries can secure the allowances more cost effectively than they could in a situation in which less green energy was produced. Because of the coexistence with emission trading, the promotion of renewable energies merely relocates emissions, it does not avoid them (BMWA 2004).
demand on markets. Reduction efforts by companies are not defined by the regulating authority as under a command and control regime. Hence, liquid and transparent markets are of great importance. Transparency in markets (about prices and traded volumes) is beneficial as it provides information to all market participants. In the US SO2 trading program, prices for private transactions were unknown to others and hence assessing a “fair” price was accomplished with relatively high informational costs. Themarket was not very liquid meaning that finding a potential seller/buyer was accomplished with search costs. These factors lead to relatively high transaction costs in general and hampered the efficient exchange of permits andthe efficiency of theemissionstradingsystem as such. Since the price is generated at primary auctions or sells (initial permit allocation by authority) and at secondary markets (exchanges over the counter trade), liquidity and transparency within themarket is crucial for minimizing transaction costs and facilitating efficient exchange of permits. Allowing intermediaries to be active in permit trading can play a crucial role here. Also markets for machinery and equipment to achieve emissions reductions can be of importance. While in the case of SO2 trading, retrofitting of existing plants to reduce emissions was relatively easy, technical solutions for the reduction of CO2 are more complex because of the non-existence of end-of-pipe technologies for CO 2 emissions. If markets for energy efficient machinery and equipment are sticky, transaction costs can hamper the effective transformation of the economy (Heindl, 2011).
Further, Perino (2015) differentiates between sector-specific and general climate cam- paigns. The former are “campaigns directly targeting specific products discouraging their consumption” (p. 473), so “the purpose of such campaigns is to reduce emissions in the targeted sectors, that is, those that experience a reduction in demand” (p. 476). Therefore, sector-specific campaigns aim at encouraging individuals to reduce their demand for products and services that are either emission-intensive in production or provision or dur- ing or after the use phase, e. g. electricity, meat, petrol or flights. Instead of aiming at reducing demand of emission-intensive products, it is also possible that campaigns are designed to promote alternatives to these and hence rather aim at increasing the demand for less emission-intensive products, e. g. “green” electricity tariffs, plant-based food, bicycles or train journeys. However, since both options aim at changing demand in the same direction and might induce similar results, both are referred to as “demand reduc- ing” in the following. Next to these, general climate campaigns “aim at increasing the intrinsic motivation of consumers to reduce their carbon footprint generally and leave it to consumers how they want to achieve this” (p. 473). In this case, consumers have to rely on information about the carbon footprint of products and services which is often calculated via an environmental impact assessment or a life-cycle analysis using stand- ards like ISO 14040, ISO 14044 or ISO 14067 (International Organization for Standardization, 2018, 2020a, 2020b). However, both types of campaign recommenda- tions are given and carbon footprint specifications are calculated without taking environ- mental policy instruments or regulations like cap-and-trade schemes or carbon taxes into account (Perino, 2015). Above, Rosendahl (2019a) differentiates between a temporary and a permanent abatement or demand reduction, whereas temporary means the demand change is only in one year and permanent stands for a demand change that lasts from the year when the first demand change is made onwards. According to this two differentia- tions, the focus in the following will be on sector-specific climate campaigns with a tem- porary effect, since Perino (2015) focused on them as well andthe goal is to update his findings. However, possible effects of general campaigns and of campaigns that lead to permanent behavior changes will be discussed later on.
In order to put our results into context with current policy debates, we may compare our optimal carbon price floor levels with price floors that are currently discussed in certain EU countries even though most of them, with the exception of the German climate levy, do not include any shifting of targets (policy 1) or retirement of allowances (policy 2). Thus, they do not imply any emissions reductions and further increase inefficiencies as shown by B¨ ohringer et al. (2008) and Heindl et al. (2014). It is important to note that - in its current design - this price floor as for instance announced in France (The Guardian, 2016) will further increase inefficiencies in the EU because it is simply an additional amount that certain emitters have to pay on top of the ETS allowance price. We find that it would increase EU ETS abatement costs by 1.1%. According to our policy scenarios, France has a much lower potential to reduce inefficiencies of the entire EU carbon market than other countries. Figure 4 shows the Inefficiency measure I depending on the national carbon price floor level for selected countries and both policies. The horizontal line indicates the second best benchmark situation with 24.5% higher costs compared to a carbon market with all sectors included in the ETS (I bmk = 1.245).
JEL : Q58, D23, H23
Keywords : Environmental policy, transaction costs, EU ETS, emission trading
The EU EmissionsTradingSystem (EU ETS) has the objective to achieve the EU’s carbon emission goals at min- imum cost. Instead of imposing a tax to reach a certain goal, the policy determines a goal and lets themarket determine the equilibrium price, which many economists have been advocating for a long time. Ideally, as this system ensures that all firms incur the same marginal price for emissions, abatement should be realized where it is cheapest so that the aggregate abatement cost is minimized. However, abatement costs are not the only costs arising from an emission trading scheme: just like any other regulation, this measure has to be implemented and managed by firms, causing a wide range of administrative, managerial and information-related transaction costs. Typically, such transaction costs are unobserved by the econometrician. Presumably, even many firms themselves do not account explicitly for the value of their employees’ time and resources spent in the course of EU ETS compliance optimization. As a result, transaction costs are mostly ignored both in academic and in policy discussions about emission trading. This study uses firm-level data to estimate these transaction costs and argues that their magnitude is relevant for many of the smaller regulated firms and should thus be taken into account when assessing the efficiency of the EU ETS.
The main market focus of course was on the price. In the early months, carbon prices rose steadily, tracking the rising gas price that determined the cost of switching away from coal in power sector generation. As gas prices continued to soar, the CO 2 price broke free from this marker and oscillated in the range EUR 20–25/tCO 2 for much of the year (Figure 1). From several perspectives, 2006 was the defining year for the EU ETS. It started with prices for phase I (2005–07) emission allowances reaching levels higher than anyone predicted, peaking at EUR 30/tCO 2 , whilst governments confidently issued draft National Allocation Plans (NAPs) for how they intended to allocate allowances for phase II, the Kyoto period of 2008–12. The year ended with phase I prices sinking close to zero, and several countries threatening to take legal action to overturn the European Commission’s rejection of almost all the submitted NAPs as inadequate. It was certainly a year of vast learning – as befits the middle of the first, learning, period of a major new system.
which is very popular in the blockchain community. We searched for whitepapers from those companies that describe a planned ecosystem or prototype.
Results of the literature review
Tables 1 and 2 provide an overview of the identified relevant articles on peer-to-peer energy exchange using blockchain technology, summarizing the project setting and basic idea described. A key difference to other domains is the early stage of the research field. Most articles either focus on the practical reasoning for a decentralized electricitymarket, or provide a technical description of a planned system (Kang et al. 2017 ). Yet, the connec- tion of the two, i.e. a link between technical feasibility and implied practical value to theelectricitymarket, is missing. Most of the articles merely describe a proof of concept that focuses on the technical feasibility of electricitytrading, ignoring economic considera- tions or user-related aspects of creating a novel energy market. Similarly, the whitepapers identified mostly contain conceptual descriptions; in fact, at the time the review was con- ducted, only a single white paper described a system actually deployed in the field: The Brooklyn Microgrid, the first running exchange in which locally produced power from solar systems is sold within a neighborhood in Brooklyn. It is operated by the company LO3, which has also started to work on other pilot regions in which they implement their exchange platform. The setup of the Brooklyn Microgrid is also documented in the academic literature (Mengelkamp et al. 2017 ).
Since 2005 the EU has been a forerunner in the implementation and operation of a multi-jurisdictional emissionstrading scheme. While the EU emissionstrading scheme (EU ETS) has been critically observed as a “New Grand Experiment” (Kruger and Pizer, 2004) in the early stage, it is meanwhile perceived as a success story which could be the nucleus for a gradually expanding system towards global coverage (Convery, 2009). As a matter of fact, the EU strongly pushes policy initiatives to link the EU ETS with other regional greenhouse gas cap-and-trade systems outside the EU (EU, 2007). 1 With respect to cost-effectiveness of emission abatement, an important characteristic of the EU ETS is its incomplete coverage. The EU ETS focuses on energy-intensive installations and thereby covers only around 40% of the EU-wide greenhouse gas emissions. To achieve its reduction target of 20% by 2020 (compared to 1990 emission levels), the EU must undertake complementary regulation of emission sources outside the EU ETS. The segmentation of emission regulation into one EU-wide ETS marketand multiple national non-ETS markets has given rise to concerns on adverse implications for cost-effectiveness of EU emission abatement: While the allocation of emission allowances across sources would not matter for cost-effectiveness in the case of comprehensive trading, it may induce substantial additional costs of emission abatement in the case of unlinked markets should the regulator not be able or willing to choose the cost-effective split of the emission budget between ETS and non- ETS segments (see e.g. Böhringer et al., 2005). 2
Linking of different trading regimes
22. Problems not only occur when linking an absolute and a rate-based permit trading regime, but also when linking trading regimes that have different monitoring, accounting and enforcement systems. If, for example, one regime does not include adequate monitoring of emissions, a source could sell unqualified allowances resulting from inaccurate GHG monitoring to others, undermining the environmental integrity of the regime (Mullins and Haites 2001). Another problem that is often mentioned is, that if penalties are not comparable across linked systems, non-compliance is likely to be exported to thesystem with the lowest penalty level. But as Baron and Bygrave (2002) note there are also other factors such as certainty of penalties, other sanctions (e.g. loss of access to market) and registries that might not allow over-selling, so that such a problem may be less evident. Pressure toward harmonisation might stem from competitive disadvantages for firms in trading regimes with higher penalties. In addition, systems with high penalties may not be willing to link to those with low penalties. As both systems gain from linking though this can also be an incentive for penalties that are acceptable to all and for stringent compliance controls. Altogether, standardised monitoring, accounting and enforcement system simplify linking of different permit trading regimes. The standardisation of at least accounting rules is the subject of section 3 below. The CATEP workshops have also shown that wherever new trading schemes are developed monitoring and accounting of emissionsand tracking permits as well as the institutional requirements (registries etc.) are acknowledged as important issues that have to be solved (Blachowicz 2002, Burkhardt 2003, Jilkova et al. 2002). The features of the existing and planned different trading regimes are summarised in Table 1 in Annex A at the end of this paper.
In summation, there are two effects for storage power plants: If we assume that flexible storage energy will be reduced by 30% compared with gross storage energy, the trigger prices and thus also the revenue factors on which Swissix is based in the more expensive hours for the Swiss market area will increase. The revenue factors of the corresponding run‐of‐river power plants from Table 1 would now be applicable to the run‐of‐river shares of the storage power plant. This spread weighted by 30% (corresponding to the assumed run‐of‐river share in the storage power plant) andthe increase in day-ahead revenue factors for flexible storage energy weighted by 70% leads to a total intrinsic value reduced by approx. 4.9%. We refrain from further differentiating whether and to what extent the run‐of‐river share of the storage plant is turbined within the framework of an SDL product, as the compensation for SDL products is significantly higher andthe correction of 4.9% would therefore be more likely weakened. In Hecker et. al 2015  the flexible storage capacities for market areas Germany, Norway and Austria are estimated by subtracting the historical run‐of‐river shares from the hourly electricity production of a market area. These also include the volumes that are produced as part of system services. Switzerland's flexible storage capacities are in competition with those in Germany and Austria. This competition is spread across all European market areas, in particular those in the neighboring countries of Germany and Austria.
Figure 2-1 TheCalifornian Approach for allocating free allowances
Source: A. Marcu and M. Elkerbout (2015)
The impact assessment document addresses tiered approaches that are not part of the Commission proposal but nevertheless have entered the ongoing reform dis- cussions. Carbon emission intensities (measured by CO2 units per EUR of Gross Value Added, GVA) and trade intensities are the relevant indicators. Thus the car- bon emission intensity replaces the currently used carbon cost criteria. This option defines four carbon leakage groups (very high, high, medium and low) as illustrat- ed in Figure 2-2. For each group, shares of free allocations are suggested (100%, 80%, 60%, and 30%).