Implementing CDM Limits in the EU ETS: A Law and Economics Approach

31 Pages Posted: 17 Jul 2010 Last revised: 18 Jul 2014

See all articles by Alexander Vasa

Alexander Vasa

German Institute for Economic Research (DIW Berlin)

Date Written: January 1, 2011

Abstract

The EU Emissions Trading Scheme (EU ETS) is the main instrument to reduce greenhouse gas emissions in Europe. Subject to a country specific limit, installations in the EU ETS can use EU allowances (EUA) and certified emissions reductions (CERs) generated through the Clean Development Mechanism (CDM) to fulfil their emission reduction target. The CDM encourages and finances emission reduction projects in developing countries. The basis for the implementation of a CDM usage limit is the supplementarity criteria, which was established to ensure that developed countries only cover part of their compliance obligations with emissions reductions abroad. The CDM limits are differentiated between EU member states to cater to the different levels of emission reduction ambitions, the progress made when the limits were established and the ability of the Member State to reduce emissions. The binding limits created substantial arbitrage rents, due to the CER-EUA spread in the range of 200 million Euro for the year 2008. This paper discusses different options for the allocation of this rent. The paper finds that making the right to use CERs tradable or the regulator precommitting to buying CERs at the level of the limit reduces the inefficiencies connected to the current regulation. Auctioning these CER usage rights furthermore shifts the rents created through the CER-EUA spread to the state. Both the EU ETS and the CDM are scrutinised by academics, industry and non-governmental institutions according to their efficiency and environmental effectiveness. The debate about wind-fall profits has shown that climate policies need to be designed carefully. In light of improving the EU ETS, the use of CDM and in light of upcoming regional emissions trading schemes in other developed economies, this paper shows how CDM limits can be designed more efficiently.

Keywords: Clean Development Mechanism, Emissions Trading, Climate Policy, Efficiency

JEL Classification: K23, K32, Q48, Q54

Suggested Citation

Vasa, Alexander, Implementing CDM Limits in the EU ETS: A Law and Economics Approach (January 1, 2011). DIW Berlin Discussion Paper No. 1032, Available at SSRN: https://ssrn.com/abstract=1641062 or http://dx.doi.org/10.2139/ssrn.1641062

Alexander Vasa (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
216
Abstract Views
1,695
Rank
256,055
PlumX Metrics