Legal and Market Uncertainty in Market-Based Instruments: The Case of the EU ETS

32 Pages Posted: 1 May 2010 Last revised: 10 Aug 2015

Giuseppe Dari‐Mattiacci

Amsterdam Law School; Amsterdam Business School; Tinbergen Institute

Josephine A. W. van Zeben

University of Oxford - Worcester College

Date Written: April 26, 2010

Abstract

‘Legal uncertainty’ is the uncertainty experienced by the parties to a lawsuit with respect to the outcome of litigation. When the consequences of a judgment extend to third parties, legal uncertainty can spread into markets and become ‘market uncertainty’. Thus, market uncertainty has relevant and pervasive consequences not only for the litigants but also for unrelated third parties. We argue that certain types of legal remedies cause the transformation from legal uncertainty into market uncertainty. This problem is particular to ‘artificial markets’, such as those created by the legislator for the purposes of marketbased regulation, e.g. the European Union Emission Trading System (“EU ETS”). Specifically, market uncertainty is a likely consequence of the use of restitutio in integrum (a property-rule remedy) as opposed to the use of damages (a liability-rule remedy). Recent litigation within the EU ETS provides a clear example of both the mechanisms of transmission of legal uncertainty to the market and of its causes. We identify the costs of letting legal uncertainty turn into market uncertainty and examine possible solutions to this problem.

Keywords: Legal uncertainty, economic uncertainty, market uncertainty, market-based regulation, property rules, liability rules, European Union Emissions Trading System

JEL Classification: D80, K20, K32, K40

Suggested Citation

Dari‐Mattiacci, Giuseppe and van Zeben, Josephine A. W., Legal and Market Uncertainty in Market-Based Instruments: The Case of the EU ETS (April 26, 2010). NYU Environmental Law Journal, Vol. 19, No. 1, 2011; Amsterdam Center for Law & Economics Working Paper No. 2010-02. Available at SSRN: https://ssrn.com/abstract=1596016 or http://dx.doi.org/10.2139/ssrn.1596016

Giuseppe Dari-Mattiacci (Contact Author)

Amsterdam Law School ( email )

Nieuwe Achtergract 166
Amsterdam, 1018 WV
Netherlands

HOME PAGE: http://uva.nl/profile/g.darimattiacci

Amsterdam Business School ( email )

Plantage Muidergracht 12
Amsterdam, 1018TV
Netherlands

HOME PAGE: http://uva.nl/profile/g.darimattiacci

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

HOME PAGE: http://uva.nl/profile/g.darimattiacci

Josephine A. W. Van Zeben

University of Oxford - Worcester College ( email )

Walton Street
Oxford, OX1 2HB
United Kingdom

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