Introduction
The European Emissions Trading Scheme is
a regulatory framework that was established to cut back on the level of
emissions produced by industries. This framework is said to be the first
cap-and-trade for carbon emissions. It is also known to be the largest carbon
trading regime in the world. This regulatory
framework was formed in 2003 by the European Commission but launched in 2005
with the goal of achieving a 20% reduction of the 1990s level of emissions by
2020 (Lepon, Rahman and Yang, 2011). Under the framework, each of the countries
under the EU jurisdiction is given a cap which limits the level of carbon
emissions allowable. These carbon caps are then distributed to participating
firms within the different countries and each organisation is provided with a
limit for the same. Any emissions in excess of the allowable caps is taxed
using a pricing model provided at the EU level with the being 25 euros per
tonne (Park, 2013). The concept of using carbon credits brings the idea of
environmental accountability to the organisation where they are by law forced
to bear the cost of their negative impact on the environment. The carbon caps
are due for review periodically depending on the conservation targets set.
Rationale for the emissions trading
scheme
The rationale for the use of legislation
to limit carbon emissions can be explained using the economic models of
marginal costs. Carbon emissions have an adverse impact on the environment and
they are a cost to the society (Freestone and Streck, 2009). Problems related
to global warming and impact on acidity have the potential to erode some of the
delicate ecosystems around the world such as the Polar Regions and the coral
reefs in sections of oceans around the world (Trotignon, 2012). This is in
addition to the possible problems on climate change that has the impact of
undermining nature-based agriculture and rise in calamities such as drought and
flooding. The costs of excessive carbon emissions are therefore high. On the
other side of the equation is the consideration that pollution has associated benefits.
These emissions are produced in the process of industrial production which
brings benefits such as improvement of the quality of life and economic
development. The cost/benefit considerations make it necessary to use the
marginal cost curves to explain the rationale for imposing carbon credit on
organisations.
Source: Krugman and Wells, 2006
The illustration above indicates that
even though additional economic activity tends to increase profitability and
welfare of the society, the marginal increase reduces with each additional unit
of emission. On the other hand, the cost of pollution is on a constant rise. At
the point of intersection (O) the optimum level is realised (Krugman and Wells,
2006). Additional output at beyond that level is more detrimental to the
environment than the associated benefits can be. In other words, at the level,
the cost to the society is very high.
The rationale for introducing carbon
taxes is informed by the interplay between private and social costs. Even
though the society benefits from economic activities, the investors benefit
much more. It therefore follows that where the society is bearing the cost of
carbon emissions, the investors should get taxed (Krugman and Wells, 2006).
Observations are that even though investors appreciate the risk to the
environment by their economic activities, they rarely take own initiative
leaving the society to bear the entire cost (Kockar, 2011). Carbon taxes are
introduced to introduce accountability at the level of each organisation to
compel them to share the burden imposed on the society due to their economic
activities.
The European ETS is the largest
regulatory regime on carbon emissions and it is binding on the entire European
region. Being the first regime of its kind, it has helped in entrenching the
thought that the fight against atmospheric pollution must be addressed at the
international level (Asli and Dömbekci, 2011). This is due to the fact that the
atmosphere is borderless and the economic activities in one country can easily
impact environmental in the neighbouring countries. In the application of this
principle, the European Union has been proactively pushing to impose their
regulatory frameworks in other countries with the latest landmark case being
the ruling by the EC Court that it was within the framework of the EU ETS to
demand compliance from the Chinese aviation industry (He and Gao, 2012). This
led to threats of retaliation through trade disputes and accusations of
disrespecting the sovereignty of other countries among other complaints.
Nevertheless, the importance of international regulation is widely acknowledged
and such complaints were only based on the lack of negotiation with the
countries involved.
Appraisal of the European ETS
Even though the initial impact of the
carbon credit regulations is an instant escalation of the cost of operation,
various benefits can be associated with it. Theoretically, efforts to comply
are often accompanied with measures to embrace more efficient technologies that
emit less greenhouse gases (Chan, Li and Zhang, 2012). In the process of
acquiring such technologies, the overall operation costs are lowered and the
organisations are able to gain a competitive edge in the market. However,
critics of this theory dismiss it as a myth and observe that there is no real
impact on competitiveness. In a survey conducted in over 5,800 companies across
10 European countries, Chan, Li and Zhang (2012) established the fact that
there was no significant change in the competitiveness of the organisations
based on their efforts to comply with the European ETS. The findings on this
aspect of sustainability have however been varied with most analysts holding
the view that ultimately, long term consumer loyalty lies with the organisation
that is seen as responsible and caring about the long term welfare of the
society.
The test for good legislation can be
examined under the frameworks of the five criteria that characterise good
regulation: legislative mandate, accountability, due process, efficiency, and
expertise (Baldwin, Cave and Lodge, 2012). The legislative backing for the
carbon emissions is provided by the European Commission’s regulations on the
Emissions Trading Scheme. This body is the highest decision making organ within
the European region and its decisions are binding on the member states (Goers
and Pflüglmayer, 2012). This is in addition to the localised laws that are
legislated to reinforce or in conformity with the European ETS. This
legislative backing gives the regulators the support needed to enforce the
rules. The aspect of accountability describes to whom the regulatory authority
reports to. The strength of the regulation is determined by the accountability
mechanisms in place. The European Commission is the overall oversight body and
is able to monitor and enforce the regulations through the regulation agencies
that are accountable to it.
In due process, it is important that
regulation enforces fairness and transparency at all times. Clarity in the
manner in which the carbon emission caps are determined and how additional
emissions are measured remains in question to date (Park, 2013). Many
organisations decry the fact that governments exercise full control over these
tools and their fairness is difficult to verify. The importance of due process
is further brought into focus where it comes to consultations with selected
companies over carbon caps to be imposed in a given year. This consultation
often leads to information leak leading to insider trading before the caps are
officially announced. They decry the fact that crucial information is not
publicised to the whole market at the same time (Park, 2013). This especially
occurs in cases where carbon caps are allocated through an auctioneering
process. In this regard, the due process element needs to be strengthened for
the regulatory regime to be more effective.
The element of expertise is also very
crucial in that experts are expected to make decisions that are trusted to be
accurate (Baldwin, Cave and Lodge, 2012). The application of expertise in
regards to the ETS is in the regular course manifested in their ability to
measure and communicate about the carbon emission levels in different
industries as a measure of how subsequent allocations are to be done in future.
For expert opinion to be regarded highly, elements of consistency and accuracy
ought to be maintained. In other words, where two different approaches to
measurement are to be used, they ought to produce the same results or have
results whose variation is insignificant. This has however not been the case
with the European ETS regulation. The two bodies charged with enforcement of
the regulation (the European Environment Agency and the EU Transaction Log)
have been providing conflicting figures hence leading to acrimony on which
figures are to be used as the choice of either results is bound to impact on
the welfare of the organisations (Trotignon, 2012).
Other than the criteria of good
legislation as outlined above, there is the angle of the internationalisation
of the regime. Proponents of internationalisation hold that the atmosphere is a
shared resource and that pollution and its impact easily flows to other
countries (Chan, Li and Zhang, 2012). For instance, predictions are that the
developing countries are likely to be hit worst by effects of climate change. Based
on this reasoning, there has been pressure on other countries to either adopt
the European ETS or legislate and enforce rules that are similar to theirs.
This pressure has come at the cost of the EU being criticised over apparent
disrespect of other countries and having a unilateralist view in its views
(Goers and Pflüglmayer, 2012). Nevertheless, a good regulation ought to be able
to handle the problems targeted effectively and the push for an international approach
to sustainability and pollution reduction is well founded. The weaknesses
noticed from the assessment above can be remedied using measures shown
below.
Recommendations for overcoming
weaknesses
Legitimacy is very important for the
success of any regulation. If the European ETS is to be adopted in other parts
of the world, its adoption should be done after due negotiations and consensus
building. Actions that can be interpreted as being disrespectful are likely to
lead to defiance and possible retaliatory measures. In regards to due process,
the information on carbon credits must at all times be released in a manner
that does not give undue advantage to any of the parties. Similarly, the
process through which the carbon emissions are measured and carbon credits
allocated should be demystified to ensure that there is transparency. This
would inspire trust and procure public support for the regulatory regime. The
same applies to coordination and the level of expertise exhibited. If more than
one body is needed to enforce the regulation, there is need to enforce greater
cooperation between the agencies. Besides, it may be advisable to separate
roles to enable avoid duplication and contradictions that could erode public
trust.
The regulatory regime just sets the
minimum level of involvement required to protect the environment. The funds
generated through carbon credits are used to implement environmental
conservation initiatives. However, the organisations need not restrict their
contribution to this. By failing to factor in cultural factors that can
motivate greater involvement in conservation, the European ETS regulatory
regime ignores a fundamental solution to the problem. Additional measures
should be taken to proactively encourage people to consume from organisations
whose record in promoting environmental sustainability is high. This would give
the investors the economic motive for investing more in conservation.
Conclusion
The European Emissions Trading Scheme
provides a sound basis for the promotion of conservation in the world by
demanding great levels of accountability from the investors whose production
initiatives are responsible for environmental degradation. The rationale for
this regulation is founded on the economic principles of marginal returns where
each additional unit of pollutant results in lower economic gain. This
interplay continues to a level where the net effect of additional pollution is
negative for the society and this forms the impetus for regulating against
excessive pollution. Under the European ETS, the organisation is able to cover
its costs of pollution by paying for any additional output above the determined
curve. In general, the regulatory regime for regulating carbon emissions is a
strong regulation. However, it needs to be improved marginally by pursuing
effective internationalisation of the regime using measures that would not
compromise legitimacy. It also needs to be improved in terms of due process and
the reliability of the expert positions portrayed to guarantee certainty.
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