Emissions Trading and the Polluter-Pays Principle: Do Polluters Pay under Grandfathering?

29 Pages Posted: 22 Sep 2008 Last revised: 18 Jul 2013

See all articles by Edwin Woerdman

Edwin Woerdman

University of Groningen - Faculty of Law

Alessandra Arcuri

Erasmus University Rotterdam (EUR) - Erasmus School of Law

Stefano Clò

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM)

Date Written: December 1, 2007

Abstract

Emissions trading is becoming increasingly popular in environmental law. Allowances to trade emissions can either be auctioned off or handed out free of charge by means of grandfathering. Although grandfathering is frequently used in emissions trading schemes, it is a popular view in the economic and legal literature that grandfathering is inconsistent with the polluter-pays principle. We come to a different, more nuanced view. The question of whether polluters pay under grandfathering depends on how the polluter-pays principle is interpreted. We present a taxonomy of interpretations. Based on an efficiency interpretation of the principle, consistency is demonstrated by emphasizing the economic impact of the opportunity costs of gratis allowances and the lump sum nature of the subsidy that is inherent to grandfathering. Inconsistency can only be claimed based on an equity interpretation of the polluter-pays principle. Allocating allowances free of charge means that polluting firms receive a capital gift making their shareholders richer, which may be perceived as unfair. We draw two conclusions. First, contrary to what some have claimed, grandfathering is compatible with an efficiency interpretation of the polluter-pays principle. Second, only auctioning is consistent with an extended form of this principle. Auctioning ensures not only that pollution costs are internalized (efficiency), but also that producers buy their allowances before they pass on those costs to consumers (equity).

Keywords: emissions trading, polluter-pays principle, grandfathering, auctioning, opportunity costs, subsidization

JEL Classification: D62, D63, H23, K32, Q48

Suggested Citation

Woerdman, Edwin and Arcuri, Alessandra and Clò, Stefano, Emissions Trading and the Polluter-Pays Principle: Do Polluters Pay under Grandfathering? (December 1, 2007). University of Goningen Faculty of Law Research Paper 01/2007. Available at SSRN: https://ssrn.com/abstract=1271843 or http://dx.doi.org/10.2139/ssrn.1271843

Edwin Woerdman (Contact Author)

University of Groningen - Faculty of Law ( email )

9700 AS Groningen
Netherlands
+31 50 363 5736 (Phone)
+31 50 363 7101 (Fax)

Alessandra Arcuri

Erasmus University Rotterdam (EUR) - Erasmus School of Law ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam
Netherlands
+31 10 408 1537 (Phone)

HOME PAGE: http://alessandraarcuri.com

Stefano Clò

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM) ( email )

Via Conservatorio, 7
Milan, 20122
Italy

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