Assessing the EU ETS Effectiveness in Reaching the Kyoto Target: An Analysis of the Cap Stringency

Abstract

The purpose of this article is to contribute with new insight to the widespread debate aimed at assessing the Emissions Trading Scheme (ETS) effectiveness in promoting emissions reduction. A theoretical benchmark consistent with the Polluter Pays Principle is determined to assess the ETS cap stringency and to evaluate if emissions tradable permits have been over-allocated by national and European authorities. This assessment clarifies how the emissions reduction burden deriving from the Kyoto Protocol ratification has been divided between ETS and non-ETS sectors. This analysis highlights to which extent Member States effectively rely on the ETS to comply with their Kyoto commitment and which inefficiencies emerge under permits over-allocation: namely cross-subsidization from non-ETS to ETS sectors, national subsidy to the ETS sectors and distortion of competition.

Keywords: Emissions Trading Scheme, Cap and Trade, Over-allocation, National Allocation Plan, Polluter Pays Principle